The new reality of 6.7% inflation is that Canadians will be forced to spend less

Soaring inflation, rising interest payments and higher prices for necessities are today's reality — all while wage hikes aren't keeping pace. And that will force many to get serious about how to spend less.

Caught between rising costs and weak wages, people will quickly look for ways to cut back

A customer browses beef and other meat selections at a store in St. John's. As consumer prices rise, many will look to cut costs in everyday spending, like on groceries. (Paul Daly/CBC)

Did your boss give you at least a 6.7 per cent raise this year? Can you think of any friends whose bosses did?

As inflation jumped by a whole percentage point last month — up from 5.7 in February to 6.7 per cent in March — Canadians are increasingly being squeezed between the rising cost of necessities and a sharp plunge in their spending power.

Bound by contracts that failed to foresee inflation rates approaching seven per cent, or held by wage restraint legislation that limits increases to as low as one per cent, the number of Canadians who will be forced to cut back is growing.

And that is beginning to be felt throughout the economy; relative luxuries like streaming services are already feeling the impact as subscribers look for ways to spend less.

For some, including those who already have every nickel accounted for, it is nothing new, said Shirley Tillotson, a professor emeritus of history at Dalhousie University in Halifax who has studied taxation and inflation.

Those people have had to cut back steadily amid lingering inflation.

"It is genuinely a problem for people on fixed incomes, seniors who have unindexed pensions," said Tillotson. "People who are on social assistance or any other form of public benefit that's not indexed, they're all going to be terribly hard hit."

Wage hike actually a cut

The problem is that wage increases that don't keep up with inflation have the same effect on your personal finances as an actual cut in income.

Even with a raise of 1.7 per cent — more than some nurses or teachers will get this year — this 6.7-per-cent hike in consumer prices means households will have to shrink their spending by five per cent to even keep treading water.

"You've got to cut back on things that, you know, you don't necessarily need," said Adrian Chang, who lives in downtown Toronto and doesn't drive. He said he's noticed the rising cost of food and rent, and plans to go out less as a result.

But for many others, especially those with fixed expenses or the vast majority of Canadians carrying debt, cutting five per cent from their budgets will be hard. It's not just the poorest who spend every penny.

"There is a real reason to be afraid of inflation," said Tillotson.

Pulling both from her research and her own personal experience, Tillotson said that for people who have lived through times of sharply rising prices, such as the Second World War or the 1970s and 1980s, just the word inflation scares them.

And historically, governments have been afraid of it, too. Tillotson points to a 1945 National Film Board propaganda film titled Money, Goods and Prices, which uses what she calls a "voice of God" narration to patiently explain how wartime inflation works and how the government was going to fix it.

The difficulty then, just as now, is that inflation is not easy to fix.

While most people can swallow some inflation by dipping into savings or cutting back a bit, this latest increase — a 31-year high — puts a real hole in household spending plans.

WATCH | Answering your questions on rising inflation rates:

Answering your questions on rising inflation rates

1 year ago
Duration 11:22
Zainab Williams of Elleverity Wealth Management answers viewer questions about how to deal with the rising prices of food, gasoline and other essentials.

It also comes as interest rates have started to rise. And despite a federal rule that those taking out a mortgage must have a financial pad to cover those rising rates, once the mortgage is obtained, there is nothing to stop borrowers from spending that money or committing to new loans, including lines of credit.

For many mortgage holders, the increase will be invisible, as lenders simply increase the number of years needed to pay the money back — and that means the effects of today's rate increase will stretch long into the future. It is one of the reasons banks tend to do well during times of rising interest rates.

For seniors, there are already signs some people are working longer. For young people, they may try to find a second job or work more hours. And they may save less for their retirements.

Is it transitory this time?

Perhaps the worst thing about ballooning costs is that no one can be sure what the future will bring.

While some say there may be signs that inflation is reaching a peak, including CIBC economist Andrew Grantham, that is far from certain. In the meantime, he said, after the shock of a 6.7-per-cent price increase, expect more and faster interest rate increases.

"The … surprise is likely to bring another non-standard 50-basis-point hike from the Bank of Canada at its next meeting," Grantham said in a statement yesterday.

Almost perversely, rising house prices have only a small effect on inflation until rates start to rise. But those sharp interest rate increases come straight back into inflation, because they push up mortgage costs, which then feed straight into the housing component of the consumer price index.

Tillotson is less certain we are over the inflation hump. It is reasonable to expect higher wage demands from organized labour to catch up as union contracts end, she said, but catching up with years of accumulated inflation is hard.

She pointed to the growing conviction that inflation is governed by inflationary expectations — what Tillotson called a "self-fulfilling prophecy."

But one of the most confusing things of all is that recent world events, including the Russia-Ukraine war and a new backlog in Chinese ports, have compounded the inflationary effects of the COVID-19 pandemic.

About a year ago central bankers and many others, including Tillotson, were predicting inflation would be a flash in the pan, gone by this August.

"I was part of 'Team Transitory,'" said Tillotson. "But now there's this massive shock, and so we're in this period of really hard-to-predict macro forces. And so that's frightening."

Follow Don on Twitter: @don_pittis


Don Pittis

Business columnist

Based in Toronto, Don Pittis is a business columnist and senior producer for CBC News. Previously, he was a forest firefighter, and a ranger in Canada's High Arctic islands. After moving into journalism, he was principal business reporter for Radio Television Hong Kong before the handover to China. He has produced and reported for the CBC in Saskatchewan and Toronto and the BBC in London.