I have wondered for quite a while how to interpret the widespread references to the affordability crisis, fostered largely by politicians to justify or criticize government policies.
Dictionary definitions vary but a common one is something like “things being cheap enough for people to be able to buy.”
This is a vague notion at best. It could be finding things at a price low enough to be bought without undue strain on one’s finances, literally the “ability to be afforded.” But it could just as easily refer to having enough income to buy those items, since lower prices and higher incomes would both provide affordability. And who are we talking about?
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The affordability crisis hits very differently, depending on whether you’re well off or less so.
It is not hard to trace the affordability crisis rhetoric to the surge in prices following the worst of the COVID-19 pandemic starting in 2022. That year the CPI-all items index rose 6.8 per cent, the largest increase in prices in 40 years. Bank of Canada policies to raise interest rates and restrain demand reduced inflation to 3.9 per cent in 2023 and to the two per cent target in August of 2024.
Clearly, however, some damage had been done. From January of 2022 to this August, a period of only 32 months, goods and services in the CPI basket were 14 per cent more expensive.
Items that were previously affordable might no longer be so, particularly if a household’s income did not rise adequately to compensate for rising prices.
Moreover, the prices of key items like housing and food, which make up 46 per cent of the CPI, were increasing at a faster rate. Shelter costs in the CPI rose at about the same rate as the all-items CPI in 2022 but continued to increase at a six per cent annual rate as inflation subsided in 2023 and 2024, driven by rising mortgage and related interest rates. And food prices in the CPI rose 10.5 per cent in 2022, much faster than inflation, before settling into the same inflation range as the all-items index in 2023 and 2024.
Thus, consumers felt a sharp spike in food inflation in 2022, followed by steadier but significant increases in shelter costs throughout the post-pandemic inflation wave.
This pattern of higher food and shelter costs would impact consumers differentially, depending on their circumstances and income growth.
Moreover, even households whose incomes were growing at or above the rate of inflation might initially mistake higher income for greater purchasing power until they visited the grocery story or renewed their mortgage. This form of “money illusion” that I wrote about in the Free Press recently (Are wages and salaries keeping up?, Aug. 29, ) has particular resonance during bouts of unexpected high inflation and fuels much of the current dissatisfaction around us.
My sense of the differential impact of post-pandemic inflation across households was recently confirmed with the release of a report from the Parliamentary Budget Office, A Distributional Analysis of the Purchasing Power of Canadian Households Since 2019. The good news in that report is that the purchasing power of Canadian households, after accounting for inflation, has increased by about six per cent between the end of 2019 and the end of 2023, or about 1.5 per cent per year, hardly the basis for disillusionment.
Rising transfers from government were most responsible for the growth in purchasing power, but there were also significant gains in wages and net investment income. A recent survey by Normandin Beaudry forecast annual salary increases of 3.6 per cent for 2024 as workers continue to catch up on past inflation, and financial investments have produced strong returns since 2020.
So what’s the bad news from the PBO report? Market income, essentially wages and investment income, grew by more than 10 per cent over inflation from the end of 2019 for the top 60 per cent of households, but fell behind inflation by more than five per cent for the bottom 40 per cent of households.
Lower wage increases largely accounted for this discrepancy, although the richest 20 per cent of households have also realized a sharp rise in investment income. Rising interest rates improved the investment returns of wealthier Canadians while also raising the interest payments on consumer credit and mortgages for everyone else.
At the provincial level, the PBO analysis suggests that Manitoba took up its usual spot in the middle of the spectrum, as our small improvement in household purchasing power since 2020 was better than Alberta, but worse than Saskatchewan and Ontario.
Still, the very small overall improvement in purchasing power undoubtedly reflects a significant improvement for higher income households. This leaves lower income households worse off than before the pandemic, as inflation outstrips improvements in wages, investment income and government transfers.
It does not seem surprising then that lower income households are unhappy with their deteriorating purchasing power. What does seem surprising is that the discontent appears to reach into higher income households. Post-pandemic inflation seems to have unsettled even those who have done quite well, making the return to more normal economic conditions very welcome.
Wayne Simpson is a professor in the department of economics at the University of Manitoba.
