Provincial Inflation Outlook:

Oil prices hooked higher in October although have declined in November. While there are uncertainties surrounding the outlook for oil prices in 2023, we can be confident that they won’t contribute as much to overall inflation as they did during their massive runup in 2022. Less energy price inflation should pay dividends for households in the Atlantic Region and the Prairies. 

Outside of the Atlantic Region, food prices have made the largest contribution to overall inflation in Quebec. This is because they’ve grown a bit faster than in the country overall and have the highest weighting of any province. How food prices evolve moving forward is perhaps the biggest wildcard in our inflation forecast. We assume that food price inflation will moderate in the coming quarters, but at a comparatively gradual rate compared to most other goods areas.  Regardless, should it ease as anticipated, this will be a boon for households in La belle province. 

Although supply/externally driven inflation should continue to cool moving forward, inflation tied to domestic economic factors will likely prove to be a tougher nut to crack. That said, it is also the type of inflation that the Bank of Canada has the most influence over through interest rate hikes and their cooling impact on aggregate demand.

This type of inflation generally captures price movements for a variety of services, and services inflation has historically been stickier than goods inflation. For instance, during periods in the 1970s and 1980s goods inflation was running hot, much like today. The fever in goods inflation ultimately broke then, as commodity prices declined. Unlike the dynamic in goods prices, services inflation kept rising and peaked more than a year after that of goods. What history tells us then, is that there is likely to be more stickiness to inflation in provinces like Ontario and B.C. (where services spending is a very important part of the consumption basket). And, given the high importance of services to these two provinces, it’s really no surprise that domestically driven sources have accounted for the largest share of their overall inflation in 2022 (see Chart 2).  

Due to its relatively rapid growth and outsized weighing in their CPI baskets, shelter inflation has also been an important part of the domestically driven inflation story in B.C. and Ontario (Chart 5). However, as a function of their overstretched housing affordability backdrop, Ontario and B.C. have seen the steepest declines in their home prices as borrowing costs have ratcheted higher. We expect this to continue filtering through into significantly slower inflation for homeowners’ replacement costs. This in turn points to a cooling in overall shelter costs, following inflation rates of around 7-7.5% in both markets this year.

Even with this downward pressure on inflation, shelter costs are likely to remain stubbornly elevated and well above historical averages in Ontario and B.C. in 2023, as the sheer magnitude of the anticipated increase in mortgage interest costs from the Bank of Canada’s rate hiking campaign provides a huge offset. In addition, rents are rising rapidly in both B.C. and Ontario. We think there will be some persistence to this trend in both regions next year, as immigration supports robust population growth. 

Putting it all together, inflation should grind lower across all provinces in 2023. However, inflation rates in the Atlantic Region could experience even steeper disinflation than elsewhere in Canada, on the back of slower energy price inflation. A similar story should hold in the Prairies, who also stand to disproportionately benefit from lower goods prices via easing supply chains.  One caveat is that we expect home prices to show some resilience in the Prairie region, which should keep inflation from falling by as much as in the Atlantic. In contrast, inflation is likely to be stickier in Ontario and B.C., while Quebec records a more middle-of-the-pack performance.