Why Is Inflation Stickier in Quebec?

Although inflation in Canada has fallen back down to around 3% since June, it appears to have stalled at a higher level in Quebec. In July, the year-over-year change in the Consumer Price Index (CPI) came in at 3.9% for the province compared to 3.3% for the country as a whole. Even though the provincial and national figures sometimes diverge slightly for a few months, the gap has widened since the start of 2023 (graph 1). In fact, inflation grew faster in Quebec than in any other province. What could have caused this difference? And will it remain the status quo over the short term?

 

Global Factors: Impact on the Price of Goods

In Quebec and across Canada, year-over-year growth in the price of goods peaked at around 10% in mid-2022. As explained in a recent Economic Viewpoint External link. This link will open in a new window., global factors played a major role in pushing up goods prices at that time. But they’ve since subsided, which has helped cool inflation in the goods-producing industries.

 

Pressures on both energy prices and supply chains have eased all over the world, including across Canada. Since the spring, energy price inflation has rapidly lost momentum and even dipped into negative territory. In July, it fell 15% year-over-year in Quebec and in Canada as a whole, lowering production and transportation costs in other sectors.

 

The recovery of global supply chains also helped curb price gains for many goods. Most businesses across the country rebuilt their inventories, which had fallen exceptionally low during the pandemic. Consequently, supply for most products improved as consumer demand started to taper off. In July, goods inflation totalled 2.5% in Quebec and 2.3% across Canada, compared to 6.5% when the year began.

 

Services Inflation Has Remained High

Services inflation in Quebec remained well above the national average (graph 2). Inflation in Quebec’s services sector came in at 5.4% in July, which was almost as high as in January (5.8%). Clearly, the province hasn’t made much progress in this area since the start of 2023. Meanwhile, services inflation for the country as a whole fell from 6.3% to 4.3% over the same period. Since labour costs represent around a third of the price of services, substantial wage gains in Quebec probably drove inflation in several service categories. Moreover, since pandemic-era shutdowns were longer and more frequent in Quebec, they took a heavy toll on many kinds of businesses. Companies therefore had to demand higher prices from customers to stay profitable, especially in the food services sector.

 

As for demand, spending on services ramped up significantly in Quebec during 2022. More generous financial support from the Quebec government compared to other provinces and a 4.1% jump in average weekly earnings pushed personal income after tax and inflation up 1.6% in 2022 versus a 0.4% drop across Canada. Consequently, service spending grew at a faster clip, adding to price pressures in the province. Goods-producing industries didn’t get the same boost, since spending on goods cooled after exploding during the pandemic.

 

However, the factors supporting service spending don’t have as much of an impact on prices in certain categories, especially shelter, which is the component that’s most heavily weighted when calculating CPI. Shelter represents nearly 30% of Canadian household expenditures. For July, shelter inflation accelerated faster in Quebec (5.7%) than in Canada as a whole (5.1%). That month, a sharp jump (around 30%) in mortgage interest costs and an increase in rents (around 5.5%) have affected homeowners and tenants both within the province and across the country. However, shelter CPI in Quebec rose more rapidly due to differences in the costs associated with owning a home, such as home insurance, maintenance and repairs.

 

Food prices also continued to grow more quickly in Quebec. Although in January food price growth was around 10% in Quebec and across Canada, in July it fell to 9.4% and 7.8%, respectively. The difference was due to both food components: the prices of food purchased from stores and from restaurants. As a share of CPI, food accounted for 16.1% of Canadian household expenditures and helped keep inflation higher in Quebec.

 

In addition, the introduction of the national child care system reduced the cost of child care services by around 20% year-over-year for the country as a whole. But the program hasn’t had much of an impact in Quebec, which has had its own network of subsidized daycares for more than 20 years. This factor has eased upward pressure on the cost of living for families across Canada.

 

Non-essential Expenses

Spending on recreation takes up around 10% of Canada’s total CPI basket. This includes three types of non-essential expenses that once again posted impressive year-over-year gains in Quebec in July: the purchase and operation of recreational vehicles (+4.3%); home entertainment equipment, parts and services (+6.1%) and other cultural and recreational services (+4.8%) For several months, these categories have shown stronger price gains there than in Canada as a whole.

 

Consumers have more of a financial cushion in Quebec than in some other provinces, which may have further boosted consumer discretionary demand and therefore prices. Despite the recent deterioration in household finances, debt ratios in Quebec are well below the Canadian average; while savings rates remain higher. According to Statistics Canada External link. This link will open in a new window., savings are concentrated among households in the highest income brackets. These families usually dedicate a larger share of their budget to non-essentials. Despite the high-inflation, high-interest-rate environment, spending on recreation remained reasonably robust in Quebec, while wages in this industry advanced further than across all sectors, exacerbating price pressures.

 

Conclusion: Will This Remain the Status Quo over the Short Term?

The factors that have kept inflation higher in Quebec over the last few months should gradually fade. First, it appears the labour market has started to soften and wage growth has recently fallen below the Canadian average. Second, savings rates have plummeted since last year, after government support measures sent them skyrocketing. Furthermore, after-tax income and inflation are expected to falter in 2023, ending the uptrend of recent years. Some spending, especially on non-essentials, is bound to shrink in an environment where high interest rates are taking a bigger bite out of family budgets. Finally, Quebec’s economy entered a fairly broad-based downturn earlier than is anticipated for Canada as a whole, which should soon ease price pressures. We therefore expect inflation in the province to catch up to the national average before long.