How Inflation Has Reshaped Canadian Household Finances

Inflation and higher interest rates have materially reduced the purchasing power of many Canadian households since 2022, with the negative impact most pronounced for lower-income families, according to a report from the Parliamentary Budget Officer (PBO). At the same time, wealthier households have generally maintained or increased their purchasing power, largely because of gains in investment income.

Over a longer horizon—from the last quarter of 2019 through early 2024—average household purchasing power in Canada rose by about 21%. That net gain reflects a combination of government transfers, wage increases and positive returns on investments, the PBO’s analysis shows. However, that aggregate outcome masks significant differences across income groups.

Inflation’s disproportionate impact

Lower-income households were hit hardest because small income increases could not keep pace with rising prices. During the period examined, the average price level for a typical basket of goods and services rose by roughly 15%. That inflation was concentrated in essentials—food, shelter and transportation—which together made up more than three-quarters of the overall price increase despite representing less than half of the consumption basket in 2019.

Looking back on the last few years

Inflation pressures began increasing in 2021 as higher raw material costs and supply-chain disruptions pushed prices upward. Inflation accelerated markedly in 2022, and the Bank of Canada responded by raising its policy interest rate from pandemic-era lows to about 5% by mid-2023 before pausing.

The Consumer Price Index (CPI) peaked at 8.1% in June 2022 and subsequently slowed as higher interest rates moderated demand. Those higher rates, while intended to curb inflation, had mixed effects on households: they raised borrowing costs—particularly mortgage payments—yet they also increased returns on some financial investments.

According to the PBO, the investment income of the top 20% of households grew faster than their interest expenses, producing a net income gain that helped preserve or raise their purchasing power through 2023. For many other households, however, increases in interest payments outpaced any investment gains, causing purchasing power to stagnate in the middle income quintiles and to decline among the lowest-income households.

“In summary, the purchasing power of most households remained higher in the first quarter of 2024 than in the last quarter of 2019,” the PBO notes, but it emphasizes that the decline since 2022 has been uneven, disproportionately harming lower-income Canadians.

Will falling interest rates provide relief?

The Bank of Canada began cutting its key rate earlier in 2024 as inflation moved closer to target, and further rate reductions are expected. Lower interest rates can offer meaningful relief to homeowners by reducing monthly mortgage costs and easing debt-servicing burdens.

Finance Minister Chrystia Freeland has highlighted recent rate cuts and pointed out that wages have outpaced inflation for many consecutive months, which together should help make paycheques stretch further. Nevertheless, the PBO’s findings underscore that broad economic trends do not affect every household equally: policy shifts that lower borrowing costs may take time to restore the lost purchasing power of lower-income families.

Further reading on inflation

• Canada’s recent inflation rate and what it means for household finances and investments
• How high inflation affects retirement savings
• Shifts in consumer behaviour: more purchases of private-label grocery brands
• Global central bank actions and the path toward reducing interest rates