Why Are Prices So High In Canada? (2024)

The Bank of Canada’s (BoC) string of interest rate hikes seemed to have helped tame inflation without hurting the economy.

In February 2023, the central bank raised its policy interest rate to 4.5%, increasing the cost of borrowing by 25 basis points since the last increase in December 2022. The bank decided to hold steady following its January hike, keeping the rate at 4.5%. However, in June 2023, the Bank of Canada raised its policy rate again by 25 basis points, bringing the policy interest rate to 4.75%—the highest it’s been since April 2001. In July, the bank hiked the rate to 5% and it has stayed there ever since.

One of its main inflation metrics, the Consumer Price Index (CPI), shows that even though inflation is still well above the Bank of Canada’s 2% target, rising 3.8% year-over-year since September, it’s well below its highest level of 8.1% from June 2022. Further rate hikes may still be on the horizon, though. The bank has expressed concern that Canadians will become accustomed to high inflation if it carries on for too long, citing a risk of the trend becoming “entrenched.” While the BoC has demonstrated its willingness to pause interest rate hikes when warranted, taming inflation is still the bank’s main focus.

Since the rate hikes began, Canadian banks responded by raising their prime rates. The July hike had big banks raise their prime rates from 6.95% to 7.2%. Of course, this rate has an immediate impact on all loans with a variable interest rate. Variable-rate mortgage holders will feel the most acute pain, but lines of credit will also be affected by this, as well as some credit cards.

If you’ve grocery shopped recently, you may have noticed that food costs a lot more than it used to.

As of May 2023, grocery prices rose 9.0% year over year, slowing from 9.7% in March and 10.6% in February, according to Statistics Canada.

While an increase in food prices was predicted, we’ve far exceeded the expected increase in costs. Dalhousie University’s 2023 Food Price Report, predicted a 5% to 7% increase in the price of food over 2023, estimating a family of four can expect to pay $1,065.60 more for food in 2023 than they did in 2022. The Food Price Report acknowledged that last year’s edition made the same prediction but fell short of the actual increase by as much as half. “At 7%, our forecast a year ago was considered by many to be alarmist,” the report says, “Yet here we are with a food inflation rate above 10%.”

The reason for the continued price hike? Supply constraints due to unfavourable weather in growing regions and higher input costs like animal feed, energy and packaging materials are said to be to blame. However, grocery industry leaders had to account for this outlandish rise in cost, amid widespread suspicion that corporate greed is a factor in driving prices up.

Another factor in why your grocery bill might be outlandishly high: The trend of food producers intentionally reducing the quality of prepared and packaged foods to boost margins. A CBC Marketplace report flagged a pumpkin pie filling that substantially replaced vegetable oil with water while simultaneously upping its price by 50%. So, if your canned tomato sauce seems runnier than it used to, you now know why.

One of the best ways to beat the rising cost of feeding yourself may be to reduce waste. Research by the National Zero Waste Council estimates the average Canadian household wastes 130 kilograms of food per year, almost two-thirds of which would have been edible. The organization recommends meal planning, while using leftovers and better storage to make the food you buy go further.

According to Statistics Canada, gasoline prices fell 18.3% in May 2023 compared to the high prices in May 2022. In April 2022, they spiked partly due to Russia’s invasion of Ukraine. However, gasoline prices were 10.0% higher in April 2023 than they were 18 months earlier.

There’s also good gas news for consumers in Ontario, where agas tax break that was supposed to expire at the end of this year will be extended through 2023. Premier Doug Ford announced the provincial gas tax will remain at $0.9 per litre, a 5.7 cent reduction from its usual level.

Despite this welcome news, lower gas prices aren’t guaranteed to last forever. The latest warning sign is a shuttering of the Keystone Pipeline, which carries crude oil from Canada to the United States, after it caused the largest oil spill in the US since 2010.

In anticipation of gas prices rising again, now is the time to start (or continue) practicing good driving habits. Natural Resources Canada recommends driving less, combining trips and practicing fuel-efficient driving techniques to squeeze more kilometres out of your tank.

Despite little concrete evidence that a recession is guaranteed, talk of it happening has spread like wildfire among North American economists and forecasters from Canada’s big five banks. Truth be told, the only way for inflation to decrease to the Bank of Canada’s stated goal of 2% is for spending to contract and the Canadian economy to slow down. However, the good news is, economists and the Canadian federal government only foresee a mild to moderate recession, so it won’t be as severe as first thought.

The key overnight interest rate has reached 4.75% and in Q1 of 2023, the GDP has risen slightly to 0.3% with steady growth forecasted to resume by mid-year. So, while it may have been a rough year at first, eventually demand for goods will subside enough that central banks will feel confident lowering interest rates. This will begin to unwind high inflation in 2024 and The Bank of Canada could then reach its goal of 2% inflation by 2025. So while we may be just about to face the worst of the economic outlook now, Canadians can rest assured that it won’t last long.