Getting Squeezed: New Report from the Business Data Lab Breaks Down the Effects of Inflation and Rising Costs on Canadians

In 2022, inflation spiked at over 8% — the highest it’s been in the last 40 years. Because of this overshoot, consumer prices in Canada are now 7% higher than they would have been if inflation had grown at the 2% target rate since the start of the pandemic. According to a new report from the Business Data Lab (BDL), the result is that homeowners, consumers and business owners across the country are feeling the squeeze of high interest rates and housing and energy costs.

The report, Getting Squeezed: The Impact of Rising Prices for Housing and Energy, Interest Rates and Costs on Canadian Consumers and Businesses, answers the following questions:

• How have recent increases in housing and energy costs affected consumer spending?
• Are there notable differences in the impact on consumer spending across regions?
• Are these trends systemically related to business sales and sentiment across regions?

Let’s look at some key findings from the report.

The Situation

Since March 2022, Canada’s central bank has raised interest rates to try and control inflation, which increased borrowing costs for consumers and businesses. Higher interest rates make it more expensive to pay off debt (including mortgages), borrow to buy big ticket items and run a business. With greater debt service obligations, consumers have less money available for discretionary spending on other goods and services, which drives down business sales.

Looking back at longer-run inflation drivers, the BDL report finds that over the past two decades, housing and energy costs have increased at a faster rate than overall prices in all regions of the country.

Housing Costs

Canada’s housing market is the most unaffordable it’s been in over 30 years. For the typical Canadian household, this means that all-in housing-related expenses (which includes mortgage payments and utility fees) have ballooned to represent 55% of disposable income. The higher this percentage, the more difficult it is to afford a home.

Mortgages
The 5-year fixed mortgage rate has risen significantly from 1.9% in 2021 to more than 5.5%. Looking ahead, with almost 60% of all outstanding mortgages — representing $900 billion — up for renewal in the next three years at higher interest rates, this is expected to act as a significant drag on consumer spending.

Energy Costs

Like housing, energy costs have also risen faster than other consumer items across provinces over the long run, with energy prices being more volatile.

Impact on Consumers

Across income levels, over half of Canadians are concerned about the cost of living and most (54-64%) are reducing their spending to protect against high inflation, especially lower-income households. BDL analysis finds that consumers in regions with greater housing affordability challenges, such as British Columbia and Ontario, have cut back more on their spending than consumers in more affordable regions.

Impact on Business

According to the Getting Squeezed report, inflation, input costs and interest rates/debt costs are the top three obstacles expected by businesses in the next three months. Small businesses in particular are struggling with fuel and energy costs, wages, and taxes and regulations.

With consumers spending less, business sales are suffering, leading to lower business sentiment. BDL finds that in regions with the most unaffordable housing markets, businesses are more pessimistic about their sales, and are also less optimistic about their outlook for the year ahead.

What mechanisms could be causing this?

• When consumer costs for housing and/or energy rise faster than overall inflation, consumers adjust by reducing their spending on discretionary items like travel, entertainment, and eating out, which reduces business sales and lowers business sentiment.
• When interest rates rise, consumers need to spend more on debt servicing. Consumers adjust by reducing their spending on big ticket items typically purchased by borrowing, such as housing, home furnishings and cars, which reduces business sales and lowers business sentiment.

Looking Ahead

The bottom line is that Canada’s affordability crisis is bad for both households and businesses. Communities across the country can’t wait for the prospect of lower interest rates to solve the crisis. Proactive attention must be paid to Canada’s economic health, with special consideration given to announced legislation and new regulations that could further aggravate the situation.