Inflation, interest rates hit lower-income Canadians' purchasing power harder: report

A new report from the parliamentary budget officer reveals that inflation and rising interest rates have significantly eroded Canadians' purchasing power since 2022, with lower-income households feeling the most impact.

In contrast, wealthier households have benefited, largely due to gains in investment income.

Over the longer term, from the last quarter of 2019, the average purchasing power of Canadian households increased by 21 per cent. This growth was driven by government transfers, wage increases, and net investment income, according to Parliamentary Budget Officer Yves Giroux.

However, the report cautions that this overall increase does not reflect the full picture of recent changes in purchasing power. "Inflation and the tightening of monetary policy have disproportionately affected households depending on their income level," the report said.

For lower-income households, "small increases in income were not enough to offset the effects of inflation on their purchasing power."

Since 2019, households have faced an average price hike of about 15 per cent on a typical "basket" of goods and services, with food, shelter, and transportation accounting for over three-quarters of the inflation. These categories, however, comprised less than half of the 2019 consumption bundle.

The report notes that inflation began rising in 2021 due to supply chain disruptions and increased raw material costs. As inflation surged in 2022, household purchasing power declined. The Bank of Canada responded by aggressively raising interest rates, reaching five per cent by mid-2023.

The consumer price index hit a record high of 8.1 per cent in June 2022, but has since slowed under the impact of the rate hikes.

While higher interest rates have increased mortgage costs for many households, they have also boosted investment income, particularly for wealthier households. For the top 20 per cent of earners, investment income grew faster than interest payments, leading to a net increase in income and enhanced purchasing power in 2023.

On the other hand, for most households, rising interest payments outpaced investment gains, particularly in the middle-income brackets, where purchasing power stagnated. The lowest-income households experienced a decline in their purchasing power.

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