The sharp slowdown in Canada’s annual inflation rate in May to 3.4 per cent was welcome news for households struggling with the soaring prices. But where inflation goes from here depends a lot on what happens beyond the country’s borders.
A new report by Statistics Canada analyzing inflation over the past few years shows that higher import prices, over which the Bank of Canada has little control, have contributed a growing share to the country’s inflation burden.
By looking at the homegrown and import factors behind final domestic demand prices – which, unlike the consumer price index, captures inflation pressures on not just consumers, but also businesses and governments – Statscan found import prices accounted for more than half of inflation during the final three quarters of 2022, as the rate peaked and began its decline.
That supports an argument the Bank of Canada has made throughout its rate-hike cycle: that commodity prices, global demand for goods and shattered supply chains were significant drivers of the country’s inflation.
And it illustrates the bank’s increasing reliance on the inflation-fighting fortitude of other central bankers and the fluctuations in foreign economies.
The good news is that with energy prices and supply chains easing, inflation has cooled. But to the extent that import prices continue to drive a significant portion of Canadian inflation, there’s a floor to how much the Bank of Canada can directly do to bring wrestle inflation back down to its 2-per-cent target.