Trevor Tombe: Inflation will fall in 2022

Across all goods and services, the median price increase in November was 2.8 percent
Colin Cote fills up a u-haul truck with gas at a Esso gas station in Toronto on Tuesday, June 15, 2021. Tijana Martin/The Canadian Press.

To close out the year, we’ve asked our contributors and staff to make a prediction about 2022. You would think, at least since the early days of 2020, that we’d have learned our lesson about making predictions, but we couldn’t resist. Feel free to save these if you want to embarrass us with them later.

Making economic predictions is often a fool’s errand—especially now, thanks to COVID—but at the risk of future embarrassment, I’ll make one here: by late 2022, Canada’s inflation rate will ease back into a normal range of between 1 to 3 percent.

The reason I say this is simple: the single largest contributor to the 4.7 percent inflation rate in November is high and rising energy prices. Excluding energy, the 4.7 would have been 3.3—and excluding all the cascading implications of energy prices on goods and services throughout the economy, it would have been even lower still. For perspective, each 10 percent rise in energy prices increases Canada’s overall CPI by nearly 0.7 percent. Recent energy price increases are also an outlier. Across all goods and services, the median price increase in November was 2.8 percent—half of products saw a smaller increase and half saw a larger one. So while there’s certainly pressure on prices—from supply chains to droughts—when it comes to the overall high rates we’ve seen recently, energy is (almost) the whole ballgame.

As an Alberta resident, to be clear, I hope energy prices rise even further (prices at the gas pumps be damned!), but this doesn’t appear likely. Through 2022, energy prices are poised to decline. In November this year, the average oil price was over $79 per barrel. Markets (at the time of writing this in mid-December) expect that to be around $67 per barrel by November 2022. Rather than adding to inflation, this means energy prices may pull down the average—potentially by a full percentage point. This alone appears sufficient to bring overall inflation down to normal.

Of course, so much is uncertain. But appreciating the basis for my prediction may, at the very least, help us better understand why measured inflation is high today.

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