Over the past year, as inflation soared beyond the Bank of Canada’s forecasts, officials placed most of the blame on external factors like mangled supply chains and rising commodity prices.
Now, those external forces are subsiding as oil prices retreat and supply chains return to normal. But while outside pressures are pulling down the inflation rate – it slipped to 7.6 per cent in July from 8.1 per cent in June – domestic demand is becoming a bigger influence on the trajectory inflation could take.
And as TD Economics points out in a new report, if history is any indication, so-called Canadian-born inflation could leave consumers with higher prices for longer.
For its analysis, the bank’s economists grouped inflation components into two categories — those more exposed to external forces, like food, vehicle parts, furniture and fuel, and those driven by domestic demand, like restaurants, rent, child care, household services and health care.
While the former category is slowing, the latter is picking up speed.
The economists note that in the 1970s and ‘80s, external shocks such as food and fuel drove up goods prices and helped tip the economy into recession three times. Yet each time, inflation in the prices of services, which is more tied to domestic demand, didn’t peak until more than a year later.
History doesn’t always repeat itself, and TD’s economists note the Bank of Canada now is more proactive with rate hikes. “However, some things don’t change with time,” they write. “High inflation has raised the cost of living and wages are responding. Since wages comprise a large component of service costs, it will take time for service inflation to cool.”
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