Inflation is cooling. The cost of living crisis is not

Inflation is decelerating, which should give the Bank of Canada enough wiggle room to pause interest rate hikes. But there's a big difference between things not getting worse and things getting better.

The good news is that things aren’t getting worse. The bad news is that they aren’t getting better yet

A closeup of a cash register drawer shows rows of bills and coins.
Prices in Canada for just about everything are a lot higher than they were a couple of years ago. There has been widespread progress to bring price growth to heel, though many categories continue to climb every month. (Robert Short/CBC)

Inflation appears to be coming back to earth. That appears to give the Bank of Canada enough wiggle room to pause its series of interest rate hikes. So, for the first time in a long time, Canadians can find some reason to believe the worst of the cost of living crisis is behind them.

"Given that inflation is the most lagging of indicators, and the economy is clearly weakening, we're likely to see ongoing disinflationary pressure.... There's no need for further rate hikes in Canada," said Benjamin Reitzes, senior economist at the Bank of Montreal.

But there's a big difference between "things not getting worse" and "things getting better."

Prices for just about everything are a lot higher than they were a couple of years ago. And while there has been widespread progress to bring price growth to heel, many categories continue to climb every month.

Year over year, the cost of groceries is up 5.8 per cent. That's down from more than 11 per cent this time last year, but still a substantial increase for households that are already stretched thin.

"We have seen the annual rate of inflation has started to come down, but that doesn't mean that the level of prices is not [still] unaffordable for a lot of people," said CIBC senior economist Andrew Grantham.

"Lets take for example, car prices. That's one of the things that is decelerating relative to a year ago, but car prices are still 10 per cent higher than they were two years ago," Grantham told CBC News.

Even once inflation gets back down to the Bank of Canada's two per cent target, that doesn't mean prices are going down. It simply means that prices will continue to rise from where they are now, just at a more manageable pace.

And not every component is seeing progress.

"Move over grocery prices. Rents may now be the biggest concern on the Canadian inflation front," wrote BMO's chief economist Douglas Porter.

He says Canadians are experiencing the fastest rent increase in just over 40 years.

"And this component has legs, as the rental market is showing precisely zero signs of cooling off," he wrote in a note to clients.

On the real estate front, the picture is even gloomier. Sure, the average price of a home has fallen from the peak. The Canadian Real Estate Association says the national benchmark price of a home in March of 2022 was $855,800. 

Last month that average benchmark price had fallen to $741,400. But that's still up more than 40 per cent from price levels at the end of 2019.

A for sale sign outside a house for sale in Toronto.
A for sale sign is pictured on the lawn of a house in Toronto’s east end earlier this month. Higher interest rates mean houses are less affordable even as their values drop. (Evan Mitsui/CBC)

The financial technology firm Ratehub says the price of a home has come down. But the income needed to afford one is up. 

Ratehub broke down how much you need to buy a home in Canada. They found the average price of a home in Vancouver had fallen from $1,208,400 to $1,203,300. But the income required to buy that home went from $246,100 to $250,000 because interest rates went up again.

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Ratehub says a similar story is playing out across the country.

"Home values dropped in all 10 cities we looked at, yet still became less affordable. August to September data highlights how impactful even a minor rate increase is on affordability," said James Laird, co-CEO of and president of CanWise mortgage lender.

All this as Canadian consumers and businesses say they're still bracing for a rough road ahead.

The Bank of Canada released quarterly surveys of consumer expectations and business outlooks this week. Neither release painted a particularly rosy picture.

Both consumers and businesses feel the impact of higher interest rates is "just beginning." The Bank of Canada says it generally takes about 18 months before interest rate changes are fully absorbed into the economy.

The central bank started hiking rates 19 months ago. Consumers and especially businesses surveyed by the Bank of Canada say the full weight of all those rate hikes has yet to fully hit the economy.

Karl Schamotta, the chief market strategist of the financial payments company Corpay, says many experts believe Canada is headed for a soft landing (a scenario where the economy slows enough to get inflation under control but not so much that it slips into a recession).

He's not so sure.

"It wouldn't be entirely surprising if the wisdom of the crowds proved more accurate. As George Orwell put it, 'Some ideas are so stupid that only intellectuals believe them,'" Schamotta wrote in a note to clients.

Even as inflation grinds its way back to more reasonable levels, many economists warn we are still a long way from interest rate cuts.

Grantham says if we really are through the worst of the inflation crisis, then maybe the Bank of Canada can start gradually lowering borrowing costs. But he doesn't expect movement on that until the middle of next year.

But he says Canadians should not expect a return to the good ole days of extreme low interest rates.

"There's this concept of 'higher for longer'; we're not going to get back to those very low interest rates of the past," he said.

So actual relief for most Canadians remains a light at the end of a distant tunnel. 

Before things get better, they have to stop getting worse. The good news is that Canadians are finally seeing some evidence that the getting worse phase appears to be drawing to a close.


Senior Business reporter for CBC News. A former host of On the Money and World Report on CBC Radio, Peter Armstrong has been a foreign correspondent and parliamentary reporter for CBC. Subscribe to Peter's newsletter here: Twitter: @armstrongcbc

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