Could an increase in immigration be one of the factors keeping inflation higher?

On July 12, 2023, due to inflation, the Bank of Canada raised interest rates to 5 % — the highest level since 2001. The Central Bank now expects inflation to reach its 2 % by the middle of 2025, instead of the end of next year, as predicted in April.

An increase in immigration could be one of the reasons keeping inflation higher for longer and stoking demand, says Bank of Nova Scotia economist Rebekah Young. Recently, Canada’s population surpassed 40 million people. According to Statistics Canada, the country’s population grew by a record 1.05 million last year and about 96 % of the rise was due to immigration. Young further says that the country traditionally uses population growth through immigration to increase workers and enhance supply, but things have gotten more complicated.

Bank of Canada governor Tiff Macklem doesn’t appear overly worried about it. He expects the impact of immigration growth on inflation to be “roughly neutral”. Macklem says that while newcomers filling job vacancies has been good for company margins, easing inflationary pressures, new entrants are also increasing demand for housing, helping boost rent and home prices. The main message is that immigration is adding to both demand and supply. Douglas Porter, chief economist at the Bank of Montreal, agrees with Macklem and says that initially, strong population growth tends to push up the price pressures a little bit, but the impact in the longer run is “broadly neutral.”

Porter also states that Canada has fared better than most nations in terms of tackling inflation.

Source: Financial Post