For lower-income families, prices for goods and services have risen faster than their incomes since 2019, while income inequality has widened to a record gap, according to two reports released this week.
Most Canadians have seen their purchasing power – or how many goods and services a dollar can buy – increase since 2019, despite erosion in 2022 and 2023 when inflation spiked and the Bank of Canada raised interest rates to tame price growth, according to a report from the Office of the Parliamentary Budget Officer.
However for families in the bottom 40 per cent of incomes, purchasing power has outright declined. In the lowest quintile, or bottom 20 per cent of incomes, the average disposable income increased by roughly $1,500 between the end of 2019 and the first quarter of this year. During that same period, living costs grew by nearly $2,050.
At the other end of the spectrum, spending power for families with the highest 20 per cent of incomes has surged, in part because high interest rates boosted investment income.
That disparity was driven home by new numbers from Statistics Canada on the distribution of income and wealth in the second quarter. The agency said the gap in the share of disposable income between the top and bottom 40 per cent of households reached the widest level on record, going back to 1999.
Interest rates, which are still well above prepandemic levels despite three consecutive cuts from the Bank of Canada, are behind the widening disposable income gap.
While households in the bottom 20 per cent did experience strong wage growth that offset higher borrowing costs for mortgages and consumer loans, Statscan said that high interest rates delivered another windfall to households in the top 20 per cent through investment income, boosting their disposable income by nearly 7.6 per cent compared with the year before.
Many economists believe the bank will cut rates to 2.5 per cent by the end of next year, which should help narrow the income gap. But it will still take time for struggling households to make up the ground they’ve lost.
Decoder is a weekly feature that unpacks an important economic chart.