Everything inflation: It's not just gas and food anymore — and wages aren't keeping up

Everything seems to be getting more expensive. Food, gas and housing prices are on the rise while paycheques are slow to keep pace. The CBC News series Priced Out explains why you're paying more at the register and how Canadians are coping with the high cost of everything.

Canadians familiar with the way rising prices have been taking a chomp out of their spending power are now facing something worse than what they've encountered so far.

Rising pump prices are now grimly routine. We've grown to expect the effect of shipping delays on food and things with imported components. High housing costs are now just an appalling Canadian fact of life.

But toward the end of 2021, that recognizable pattern of rising prices began to change. Until about three months ago, Canadians apportioning their weekly budgets would have noticed most price increases occurring in a few very distinct, relatively volatile, categories, such as food, fuel and accommodation. Not anymore.

Inflation has become general

While economists differ on why it is happening and exactly how the change will affect Canadians, all I spoke to agreed on one thing.

"The story is no longer about energy, about food, about housing," said Tu Nguyen, a Toronto-based economist with the consultancy RSM Canada. "It's about pretty much everything in the economy."

It used to be that Canadians trying to keep within a budget could seek out cheaper goods. They could avoid driving when gas was expensive, for example, or alter their diets to cut back on imported food. But when inflation is general, that becomes harder.

According to some economists, it is a sign that inflation may have set in for the longer term and that it will begin to hurt Canadians more.

Those at the low end of the wage scale — including women, recent immigrants and those in precarious work — are more deeply affected by generalized inflation. People with stagnant incomes and weak bargaining power end up paying higher prices, even for the less expensive goods and services they depend on.

New evidence that "everything inflation" has surged arrived in the same Statistics Canada report that showed prices overall were climbing at 5.1 per cent a year, the highest rate since 1991.

Getting to the core of the matter 

But behind that headline number, people like Stephen Tapp, chief economist at the Canadian Chamber of Commerce, drew attention to the three ways that Statistics Canada measures something called "core" inflation: an attempt by statisticians to measure underlying movement in prices by chopping out volatile goods.

The strategy, Tapp said, is to exclude prices that tend to rise temporarily, price hikes "that might just unwind and go away" without becoming part of long-term inflation.

What's remarkable about the graph Tapp posted, which is shown below, is that until November, core inflation has been dead on target for years, hovering at about two per cent, while headline inflation — a number with all of the volatile goods still included — has zipped up and down. But suddenly all three core measures have begun to climb, one of them by as much as four per cent, showing that the price of everything is on a rising path.

"Those [core] measures are going to give the Bank of Canada most cause for concern because what they are trying to target is inflation expectations, and expectations have been rising," Tapp said. He's worried there are signs that core is trending even higher.

Both Tapp and Nguyen explained that the rise in underlying inflation, after volatile goods have been removed, has two potential explanations. One is that the rising volatile prices feed back into core, because everything is shipped or needs energy or has imported components.

The other is that as inflation rises, everybody expects it to keep rising, so businesses plan price hikes to keep up with expected inflation and workers try to do the same with their wages.

Tom Velk, an economist at Montreal's McGill University, and a self-described conservative and advocate of monetarist economics, insists there is another reason core inflation is rising: too much money flooding into the economy. Although monetarism is out of fashion, notably among central bankers, he is not alone in that view.

"When there's a huge amount of money everywhere, all prices go up," Velk told me from his farm in Vermont, where he said locally produced eggs have shot up to nearly $8 Cdn a dozen. Velk insists there's "too much damn money" — and until it is soaked up with lower government spending and less central bank stimulus, core inflation is not going away.

Wages not keeping up

But if there really is too much money out there, the problem is that not enough of it is going to the people doing the work, according to Kaylie Tiessen, an economist and policy analyst at Unifor, Canada's biggest private-sector union.

If Canadians are falling behind, the reason is not strictly because prices are rising. The problem is that over the past year as inflation surged above five per cent, incomes have failed to keep pace.

"And it means workers are losing purchasing power," Tiessen said in a phone conversation last week.

LISTEN | How inflation creates even more inflation:

Of course, not all employees are losing. Sobeys' warehouse workers recently negotiated a four-year deal that included a wage increase of 20 per cent over the life of the contract. People who have studied the economics of rising wages and prices in the past say that one of the advantages of inflation is that it acts as an economic lubricant for wage and price adjustment, allowing everyone to get an increase — even though some workers and sellers get more and some get less according to demand in that sector.

Recently, the governor of the Bank of England, Andrew Bailey — who critics noted earned hundreds of thousands of pounds a year — faced a backlash when he warned British workers not to demand higher wages as inflation rose for fear of making inflation worse. Tiessen hears something similar when Canadian and U.S. authorities warn of a wage-and-price spiral.

In fact, she said that despite rising core inflation, there may be a danger in raising interest rates before workers have caught up.

"We definitely cannot put ourselves in a position where workers are always losing out," she said. "We should not put ourselves in that position, as an economy, at all."

Tiessen said a growing gap between the price of necessities and the ability of Canadians to buy them is not just bad for workers and their families. She said it hurts the entire economy when total spending power shrinks. She worries that in the worthy effort to save the economy from the effects of the pandemic, the concept of inclusive economic growth, an area where Unifor has been a strong advocate, has been forgotten.

A few months ago, when core inflation seemed safely stuck at two per cent, it may have been reasonable for central bankers here and in the United States to be patient and let the economy take its course. But now that the once-stable measure of generalized inflation has begun to shift sharply higher, it seems almost certain that the banks will try to rein it in with higher interest rates.

But if the Bank of Canada and the U.S. Federal Reserve begin to crack down on "everything inflation" with higher interest rates while wages continue to fall behind, it will be up to elected officials to make sure that the ordinary people who vote them into office are not the ultimate losers.

Follow Don on Twitter @don_pittis