Lower-income households have faced the biggest shock amid higher rates
A report from the parliamentary budget officer revealed that inflation and higher interest rates have diminished Canadians' purchasing power since 2022, with lower-income households getting hit the hardest.
On the other hand, wealthier households experienced increased purchasing power because of their investment income.
Since the last quarter of 2019, the average purchasing power of Canadian households rose by 21%, according to Parliamentary Budget Officer Yves Giroux, who noted that government transfers, wage gains, and net investment incomes supported the increase.
"However, this conclusion does not provide a full picture of the recent changes to purchasing power in Canada," the report said. "In fact, it is widely accepted that inflation and the accompanying tightening of monetary policy have affected household purchasing power disproportionately, depending on income level."
For lower-income households, "small increases in income were not enough to counteract the effect of inflation on their purchasing power."
On average, households have faced price increases of about 15% on a typical "basket" of goods and services during this period, the reports stated.
Spending on food, shelter, and transportation accounted for over three-quarters of inflation, albeit making up less than half of the 2019 consumption bundle.
The report noted that inflation started rising in 2021 due to supply chain disruptions and increased raw material costs. Once inflation surged in 2022, household purchasing power declined, and the Bank of Canada responded by raising its key interest rate from pandemic-era lows to 5% by mid-2023 before pausing further hikes.
The consumer price index peaked at 8.1% in June 2022 but has slowed due to the Bank of Canada's rate hikes.
In addition, higher interest rates increased mortgage costs for a lot of households, but they also boosted investment income, according to the report.
The wealthiest 20% of households saw their investment income grow faster than their interest payments, which led to a net income gain above inflation and increased their purchasing power in 2023.
In contrast, rising interest payments outpaces investment income last year for other households. As a result, households in the third and fourth quintiles saw their purchasing power stagnate, while those in the lowest-income quintile experienced a decline.
"In summary, the purchasing power of most households remained higher in the first quarter of 2024 than in the last quarter of 2019," the report concluded.
"However, since 2022, rising inflation and tighter monetary policy have eroded purchasing power, particularly among lower-income households."
