Canadians are expected to earn 4% more an hour on average this year, but that growth will be outpaced by the rising cost of goods and won’t catch up until 2023, a new Scotiabank Economics report says.
Inflation is forecast to be 5.9% in 2022, even as both the Bank of Canada and the US Federal Reserve have begun raising the key interest rate to tackle it.
The disparity between total compensation per hour worked and inflation is leaving households with less bang for their buck, Scotiabank Economics’ Director, Modelling and Forecasting, René Lalonde said in a report.
“We forecast an important and persistent 3% deterioration of the household net purchasing power and an increase of the net cost of living that will continue beyond 2023. This may justify temporary provincial and federal income assistance targeted mainly to low-income households,” he wrote.
Canadian consumer prices increased 5.7% in February year over year, up from 5.1% in January, marking the largest gain since August 1991. Strong demand, as well as COVID-related supply chain issues and rising commodity prices such as oil have driven up inflation.
Scotiabank Economics’ model forecasts that total compensation growth will increase to 6.1% in 2023 while inflation eases to 3.1%, partially closing this wage gap.
However, this catch-up will generate additional inflation pressures, Lalonde said.
“Starting in 2023, the Bank of Canada should expect inflation pressures coming from unit labour cost in the setting of its monetary policy which, other things being equal, will require a more aggressive and a faster increase of the policy rate.”
To read the full report, click here.