Research from the Bank of Canada and Statscan found consumers’ perception of inflation tends to put more weight on prices that go up rather than down.Chris Young/The Canadian Press
Claude Lavoie is a contributing columnist for The Globe and Mail. He was director-general of economic studies and policy analysis at the Department of Finance from 2008 to 2023.
A mid-December Abacus poll shows 62 per cent of Canadians identify high cost of living as their predominant concern. This worry isn’t unique to Canada; more than half of Americans, French and other Europeans cite cost of living as their main pressing issue. With such transatlantic consensus, country-specific causes can’t be the driving factors.
The pandemic first comes to mind, but cost-of-living complaints predate it. Polling shows 55 per cent to 60 per cent of Canadians were already highly concerned about rising costs in 2019 and 2015, when inflation was well below the Bank of Canada’s target.
But Statistics Canada data tell a different story. Households in every income group saw their after-tax income grow faster than prices over the past decade.
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Some certainly saw their income grow more slowly than prices, but the data suggest they’re a minority. Income and wage data across income, age and occupational groups show a large majority of people with incomes growing faster than their cost of living since the early 2010s, and even since 2019, the prepandemic year. Financial data also show net financial assets increasing for households across all income deciles, even when excluding housing and pension asset appreciation.
Three potential reasons could explain this gap between data and perception: incorrect data, inflation misperception and overly optimistic expectations.
Since data from various sources all point to an increase in standards of living, it’s hard to believe it’s wrong. Statistics Canada is an independent agency whose data and reports are highly regarded for their reliability.
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Bank of Canada and Statistics Canada research found consumers’ perception of inflation tends to put more weight on prices that go up rather than down. Studies in other countries also found consumer inflation perception to be more influenced by the price of frequently purchased goods such as food and gasoline. Still, surveys suggest the perceived inflation rate is above, but not far from, the actual official inflation rate.
Although it’s the cost associated with housing – utilities, rent, mortgage – that’s used in inflation calculations, some people’s perception may be overly influenced by the rise in house prices. But with about two-thirds of people owning a house in Canada, rising house prices should make them feel richer, not poorer.
That leaves overly optimistic expectations as the likely culprit. Income grew faster than prices for most Canadians, but not as much as before. For most households, the standard of living grew about 50 per cent slower between 2009 and 2023 than between 1995 and 2009. This phenomenon extends beyond Canada and stems from a decline in global productivity growth and a reduction in the share of productivity gains accruing to workers. Current employees comparing their trajectory with their parents’ experience, or with their own earlier career progression, may perceive themselves as falling behind despite objective improvement.
Economics and psychology research shows we are trying to keep up with others. And with the proliferation of social media, many people – including many rich ones – are now considered their “neighbours” or “peers.” This has altered financial reference groups and consumption norms, creating unrealistic financial comparisons and distorting perceptions of “normal” consumption and “necessary” expenditures.
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For example, evidence shows people are increasingly buying bigger cars and travelling more. Feeling you need something you don’t have the money for might increase your perception that the cost of living is too high. Consumer reports also show people buy top-tier cellphone models to keep up with trends rather than buying a more budget-friendly option that meets their needs.
So the cost-of-living crisis may just be a perception crisis, fuelled by a global slowdown in standard-of-living growth and the worldwide increase in time spent on social media. Governments can help with the former by trying to boost productivity and workers’ bargaining power, but there will be a very long lag and there’s no guarantee they know what to do.
In the meantime, we may want to start being happy with what we have, which is actually pretty good. A study by Mercer shows Canadian cities are more affordable than many cities around the world. We also need to reconcile our wishes for contradictory things: low costs when we shop, but high wages for ourselves; fewer immigrants, but cheap labour; high prices for our homes, but lower ones for our children.