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21 Sep

How to Calculate the Inflation Rate

General

Posted by: Adam Sale

Inflation Data Released Today

Great news today, this is the second month in a row the inflation data is showing the inflation rate decreasing. This is a step in the right direction, especially since we saw the Bank of Canada increase their overnight interest rate on September 7 by another 75 basis points to 3.25%.

In June, we saw the Bank of Canada switch their strategy for tackling inflation from being too passive to a much more aggressive tightening tactic. The Bank stated they plan on front-loading rates by raising the overnight rate quickly to stop inflation in its tracks.

According to the new inflation data this is exactly what’s happening, but there is still a long way to go. The current inflation rate is at 7% and the Bank is trying to bring it down to 2%.

How Inflation is Calculated

Most people understand inflation is calculated using the CPI index, which is essentially an index of prices for a group of random goods & services. The changes in prices of this group of goods & services over a period of time indicates the amount of inflation in the economy.

Fewer people understand how the rate of inflation is calculated. The inflation rate is calculated on a yearly basis. To determine the inflation rate for August 2022, we use the CPI index for August 2021 as our starting point and the CPI index of August 2022 as our current date.

The formula to calculate the rate of inflation can be presented as X-Y/Y * 100, where Y represents the consumer price index at the starting point, and X represents the consumer price index of the current date.

For example 
Starting point: August 2021: 142.6
Current date: August 2022: 152.6
Equation: (152.6 – 142.6)/142.6 * 100 = 7.01%
CPI and Inflation Data is posted monthly here: https://www.rateinflation.com/consumer-price-index/canada-cpi/

When looking at the data from the website above we notice a few things:

  1. The CPI index grew an enormous 6 points in 2021, and so far, it has grown 7 points in the first half of 2022.
  2. Based on CPI index data recorded over June – August 2022 it appears the CPI index has peaked (fingers crossed!).
  3. If the Bank of Canada is able to keep the CPI index between 152.6 – 155.0 over the next 9-months we will achieve reaching the Bank’s inflation target of 2% by May 2023.
    1. (155.0 – 151.9) / 155.0 * 100 = 2.00%

Once we achieve an inflation target of 2% it will be anyone’s guess as to how long the Bank will keep their overnight interest rate elevated before bringing it back within their target level of 2% – 3%.

Where are Rates Heading?

October 19th is when September’s inflation data will be released, and the Bank of Canada is meeting on October 26th to determine if there will be any changes to the overnight interest rate.

If the October data continues to show the inflation rate is decreasing (the CPI index is stagnant), then I believe we will see a 0.25% rate hike or possibly no hikes.

If the data shows the CPI index is still increasing, then we will likely see a 0.50% rate hike and possibly (but unlikely) another 0.75%.

If you have any questions about your mortgage and would like me to perform a calculation to determine what your monthly payments should be to maintain your desired amortization schedule please don’t hesitate to reach out.

Best,
Adam Sale Mortgages