How You Can See The Future of Canadian Inflation

Posted On 15 July 2022

Last updated on April 6th, 2024

I am currently helping with SYSCO deliveries to restaurants in British Columbia from Williams Lake to Prince George. With the commute, workdays are usually 14-15 hours long. Sometimes (like on Tuesday, when we started late due to the truck with our deliveries being stuck on the other side of an accident that closed the highway for 6 hours) we end up working late. I ended up getting something to eat while out on the road.

On the way out of Prince George we stopped at a convenience store, and I looked to see what they had for hot food. $9.99 for 6 golf ball-sized chicken nuggets?!? The three choices of sauces that the chicken was already covered with were not appealing, either. I was quite hungry, but not THAT hungry! An hour later and hungrier, I was looking at KFC’s (we delivered to them) menu in Quesnel… $9.49 for a 3-Piece chicken strip meal?? I was hungrier than for just 3 chicken strips and fries.

An hour and a half later in Williams Lake, I finally got myself a Grand Big Mac. It was delicious, although expensive! I prefer the Grand Big Mac over the smaller original size. Last summer I was disappointed to learn that the Grand was only for a limited time. I don’t remember the burger costing $7.29 a year ago! This brings me to the topic today… inflation.

Is Bigger Better?

Bigger burgers are great! Bigger prices suck! Just about everywhere we go we see that prices have increased! Incomes are increasing, too, but not nearly as fast as the prices have been increasing. We keep hearing that this Canadian inflation will pass and it’s only temporary. Then, the new inflation numbers are released, and they have increased!!

We are told different stories about why the prices are increasing. Floods, pandemic, supply chain issues, and the war in Ukraine are all blamed for the increases. It is true that they are part of the problem, although I believe there is more to the story.

Can there be more to the story? Yes. Let me explain something I use to see where inflation is heading while avoiding the bullshit. You can check out Statistics Canada if you would like to see the data, not opinions, theories, or political spin.

Picture A Pipeline

Products that we purchase have a process that they go through – similar to oil flowing through a pipeline. This process starts with raw materials, which are then transformed into industrial products, and then after companies turn those goods into consumer products, people purchase the finished products.

This pipeline analogy is a very basic way to explain the process, and it is also a very simple way to get a glimpse of how future prices may change. Let’s load some raw materials into this product pipeline of ours.

It Starts with RMPI

Canada publishes the Raw Material Price Index (RMPI) every month. This index tracks what the price is doing for raw materials such as crude oil, metal ores, and timber.

These raw materials are generally not very useful in their current state to most people. Even the trees that are cut down need to be processed into firewood before they can be burned in a fireplace or wood stove.

Even though these products have limited use and need to be processed into something more useful, they are what everything comes from.

Next Is The IPPI

As the goods progress through the pipeline, they become what are labeled industrial products. The data for this is published as the Industrial Product Price Index (IPPI). These industrial products are things such as lumber, steel, and computer chips. Industrial products are also products available in bulk and they are commonly sold from business to business.

Usually, these products are not purchased by the consumer. There are always exceptions. Homeowners sometimes buy lumber or paint for home projects. Some people build their own computers or perform their computer upgrades themselves. People also shop at Costco for their own family’s needs. Generally, though, these goods are called industrial products because people prefer to purchase finished products.

When the price increases for these products, the cost can be absorbed by manufacturers and businesses for a while, but not long-term. Companies don’t like to change their prices too much because it the customers don’t like it. When the cost of these goods remains high, businesses must raise their prices accordingly. The IPPI is a leading indicator for the Canadian inflation rate.

CPI is the Final Product

The Consumer Price Index (CPI) is the number that is used to measure the Canadian inflation rate. This is the change that the public sees. They don’t see how much a manufacturer must pay for the materials they use; they only see how much they are being charged for the finished product.

People don’t know what a restaurant pays for the food they purchase. The customer only sees the prices listed on the menu.

Now, it is easy to hope that inflation will go down in the same way we can hope that the weather will get better. Most people simply rely on the news and what the experts have to say. There is a way to see what direction inflation is heading.

The Future of Canadian Inflation

To see what the inflation rate could be in the future we simply need to look at what is going into our product pipeline. If the prices are increasing for goods entering the pipeline, what are the chances that consumer prices will be lower? Not likely!

During the lock downs in 2020, a lot of businesses were closed and there was not as much demand for products. Lack of demand = lower prices. This is basic economics! Then, when the government allowed businesses to open again, there was a bottleneck of supplies. There was also a lack of certain goods – like computer chips.

From February 2020 through September 2020 the IPPI was negative. The Canadian CPI was within 1% (+ or -) of neutral from March 2020 through January 2021.

It was in February 2021 that the inflation we are seeing now got going. People were not aware of what was coming because the CPI would not move noticeably for about 9 months. The IPPI (Year over Year) for February was +7.1% and the RMPI was +17.1%. While the IPPI has remained firmly in the double digits, the RMPI was even higher with up to mid-double digits!

When 2022 rolled around, the CPI passed 5% and has been climbing every month. Meanwhile, the IPPI has been in the mid to upper teens and the RMPI has been in the 30’s and 40’s this year.

Results May Vary

This is a quick and simple method to see the future of inflation. Because of this, there is room for discrepancies. There are a lot of factors that go into inflation.

I hope that this gives you a way to cut through the BS and plan accordingly for what the future holds in store. When we can see what direction prices are headed, we can position ourselves to survive financially.