5 Things to Know About Inflation Today

Whether at the gas pump, the grocery checkout or ordering takeout, it seems like everywhere we turn these days prices are on the rise. And that means the topic of inflation has been front and centre over the past few months.

With the latest numbers out recently in Canada, let's take a look at the current buzz around inflation. Here are five things to know now.

1. Slight slowdown: Statistics Canada reported on July 28 that the country's headline inflation rate slowed to 3.1 per cent in June from a decade high of 3.6 per cent the previous month. Rising home ownership costs and car prices accounted for about half the growth in June's headline consumer prices relative to pre-pandemic, according to RBC Economics. (In the U.S., consumer prices rose the most in 13 years in June.)
2. Still above target: Canada's June inflation rate held above the Bank of Canada's 1 per cent to 3 per cent target range for the third consecutive month. The Bank of Canada, in its latest Monetary Policy Report statement, said it expects inflation to remain above 3 per cent for the rest of this year before easing back toward 2 per cent in 2022. Longer term, it expects inflation to remain slightly above its target range through 2023 and then return to target in 2024.
3. What's driving inflation? The Bank of Canada attributes it largely to three key factors – all pandemic-related: a rebound in gasoline prices from low levels a year ago, other prices that fell sharply last year due to slumping demand and are now recovering as the economy reopens, and disrupted supply chains and supply bottlenecks that have led to sharp price increases for a number of products, including semiconductors.
4. Consumer demand to soar: According to RBC Economics, even if the inflationary impact of near-term supply disruptions eases, consumer demand, particularly for services, is set to surge over the second half of this year – with consumers poised to spend more on travel and in the hospitality sectors. "A sharp strengthening in that demand could stoke a more broad-based inflation that would be difficult for central banks to dismiss," RBC Economics said in a recent report.
5. Basket rebalance: Statistics Canada uses a "basket of goods and services" to generate the Consumer Price Index and inflation rates. (For a refresher, check out What is Inflation and How Does it Affect Investors?) It recently updated that basket, reweighting some components to better reflect 2020 household spending patterns. RBC economist Claire Fan said that while the update “may provide a slight downward bias to future price growth, we look for the inflation rate to remain elevated in the second half of 2021 driven by higher services prices as the recovery builds momentum."

Stay up to date on the latest on economic developments through Market Commentary, found under the Research tab on the RBC Direct Investing online site, and visit rbc.com/economics.