The rising cost of living in Canada that has dominated the headlines over the past year is, in many ways, a story about oil.
Experts say anyone who doubted the importance of energy to the overall economy need only scratch the surface of the latest Statistics Canada inflation data, released Tuesday.
“Energy is central to a modern economy. We don’t necessarily realize it until we have a big shock,” said Charles St-Arnaud, chief economist for Alberta Central, the central banking facility for Alberta’s credit unions.
“And what I think has happened over the last two years, and what I think has gotten lost in some of the conversation, is that we’ve had a shock that’s been so big that it’s non-linear.”
On the surface, the cost-of-living numbers released Tuesday are a good news story. Statistics Canada reported the country’s annual inflation rate rose just 2.8 per cent in June, slowing from 3.4 per cent in May, marking a dramatic improvement from the 8.1 per cent peak Canadians suffered through last summer.
But go a bit deeper, and much of that improvement comes from the price at the pumps.
Gasoline prices have declined a startling 22 per cent since last June, when global energy markets spiked in reaction to Russia’s invasion of Ukraine. When excluding gasoline from the equation, Canada’s inflation rate was 4.0 per cent in June, and 4.4 per cent in May.
“Gasoline prices rocketed to a record high in June of last year,” said Shannon Terrell, spokeswoman for financial advice company NerdWallet Canada, adding simple year-over-year comparisons are misleading in this case.
“What’s important to understand here is that base-year effects can skew our inflation data. Volatility in price growth one year ago may distort our understanding of prices today.”
In June of last year, the average gasoline price being paid by Canadians hit an all-time high, surpassing $2.10 per litre.
One year later, due to slowing global economic growth and the fading of concerns about supply disruptions as a result of the Ukraine war, the benchmark crude oil price West Texas Intermediate has eased off significantly — to an average US$75 per barrel for the first six months of 2023, down from over $100 per barrel on average over the same period in 2022.
But in spite of the relief that has brought for drivers, oil prices remain well above the five-year average of US$53 per barrel. And gasoline prices are still close to 30 per cent higher than they were prior to the pandemic.
In fact, that probably is one reason for the continued stickiness of inflation, St-Arnaud said, and the continued price increases in categories such as groceries — which were up 8.3 per cent year-over-year in June.
He said high oil prices take time to trickle down through the economy, and have a wide range of impacts beyond the gas pump.
“It spills over into services like public transportation. It spills over into airlines. I would be surprised if part of the food inflation that we have isn’t simply the transportation costs of bringing in all those fresh produce,” St-Arnaud said.
“When you get an oil price shock, especially in a country like Canada, the pricing behaviour of companies changes. They simply cannot absorb those increased costs without passing some of it along to the consumer.”
It’s unclear where oil prices will go in future, but WTI topped US$75 per barrel last week, its highest level in months.
In fact, the year-over-year gasoline price effect that has been behind Canada’s slowing inflation numbers is likely to disappear as 2023 progresses.
“If gasoline prices stay where they are now, we could enter a period as early as September or October where they are no longer reducing inflation,” St-Arnaud said.
“I think it’s actually underappreciated, how high energy prices jumped last year, and there’s still a hit on the consumer when you look at it in the long-term.”
Terrell said it’s likely that the Bank of Canada, which has been hiking interest rates over the past 12 months to try to get inflation under control, will remain concerned about the current rate of consumer price increases.
“While inflation has slowed significantly from last year, we have to remember that last year was an outlier,” she said.
“And as far as inflation is concerned, we are just not out of the woods yet.”