5.5 Inflation

Inflation is a general and ongoing rise in the level of prices in an entire economy. Inflation does not refer to a change in relative prices. A relative price change occurs when you see that the price of tuition has risen, but the price of laptops has fallen. Inflation, on the other hand, means that there is pressure for prices to rise in most economic markets. In addition, price increases in the supply-and-demand model were one-time events, representing a shift from a previous equilibrium to a new one. Inflation implies an ongoing rise in prices. If inflation happened for one year and then stopped, it would no longer be inflation. Similarly, a consistent fall in the average price level is called deflation.

Inflation in Canada generally averaged  between 2% and 3% each year since 1990. However, Canada’s inflation rate experienced significant fluctuations from 2018 to 2024. Inflation peaked at 8.1 percent in June 2022 before steadily declining to 1.8 percent by December 2024.
In response to rising inflation between 2020 and 2022, the Bank of Canada implemented aggressive interest rate hikes. The bank rate reached a maximum of 5.25 percent in July 2023 and remained stable until June 2024. As inflationary pressures eased in the second half of 2024, the central bank reduced interest rates to 3.5 percent in December 2024. This pattern reflected broader global economic trends, with most advanced and emerging economies experiencing similar inflationary challenges and monetary policy adjustments.^[1]

Attribution

“Introduction to Inflation” from Principles of Macroeconomics 3e by Open Stax is licensed under CC BY 4.0 International Licence..