The Rise (And Fall?) of Inflation in Canada: A Detailed Analysis of Its Post-Pandemic Experience

Abstract

Canada's inflation rate rose from 3.1 percent in June 2021 to 8.1 percent one year later. What's behind this rapid surge? And will higher interest rates ease the pressure? We explore these questions with a detailed analysis of recently rising inflation. We find a few items dominate, especially energy and items sensitive to oil prices. To separate demand- from supply-driven inflation, we use detailed household expenditure data and find rising inflation is primarily the latter. We also find items with normally transitory price changes or those highly sensitive to interest rates also account for nearly all of inflation's rise. While much uncertainty remains, time and tighter monetary policy may likely help decrease inflation.