Canadians lost purchasing power since 2022 from inflation, interest rates: PBO

A new report from the Parliamentary Budget Officer reveals that inflation and higher interest rates have reduced Canadians' purchasing power since 2022, especially for lower-income households.

However, wealthier households have experienced an increase in purchasing power, largely due to their investment income.

Looking at a longer period — from the last quarter of 2019 — the average purchasing power of Canadian households rose by 21%, supported by government transfers, wage increases, and net investment income, according to Parliamentary Budget Officer Yves Giroux.

"However, this conclusion does not fully capture recent changes to purchasing power in Canada," the report noted. "It is widely understood that inflation and tighter monetary policy have affected households differently based on income level."

For lower-income households, "small income increases were insufficient to offset the impact of inflation on their purchasing power."

During this time, prices increased by approximately 15% for a typical "basket" of goods and services. Food, shelter, and transportation contributed to over three-quarters of this inflation, despite accounting for less than half of the 2019 consumption bundle.

The report highlighted that inflation began rising in 2021 due to raw material costs and supply chain disruptions. As inflation spiked in 2022, household purchasing power declined, while the Bank of Canada raised its key interest rate to 5% by mid-2023 to combat inflation.

Although higher interest rates raised mortgage costs for many, they also boosted investment income. The wealthiest 20% of households saw their investment income outpace interest payments, leading to a net gain in income and purchasing power in 2023.

In contrast, for other households, rising interest payments exceeded their investment income, causing purchasing power to stagnate for middle-income households and decline for the lowest-income group.

"In summary, most households had higher purchasing power in the first quarter of 2024 than in the last quarter of 2019," the report concluded. "However, since 2022, inflation and tighter monetary policy have eroded purchasing power, especially for lower-income households."