Prices change all the time, and some change more often than others. How often prices change can affect how quickly shifts in economic conditions affect inflation.

Prices adjust at different frequencies

Prices tend to change more frequently when demand outpaces supply and inflation is high. This is why businesses adjusted their prices more often in the years after the pandemic than they had in the past.

More recently, however, businesses’ pricing behaviour has returned to normal.1 But even in normal times, businesses adjust some prices more or less frequently than others. The price of the median consumer product changes about once every five months. However, some prices—like that of gasoline—change every day, while others—such as the price of insurance—are typically contracted for a year.

Prices that adjust more often are pulling inflation down

Rates of inflation are now below their historical averages for many components of the consumer price index (CPI) that have frequent price changes. Indeed, as a group, these components are seeing their prices decline (Chart 26).2 This deflation reflects a quick response to slowing growth in global input costs and weak domestic demand. Components whose prices change frequently include goods such as clothing and motor vehicles and a few services such as automobile rentals.

Inflation in the prices of these more flexible products is expected to pick up as demand recovers.

Inflation is back to normal for some prices that adjust less often

Inflation in prices that adjust less often, on average, is close to its historical norm.3 However, several components are still below or above this average. For instance, inflation in communications services is currently below normal, in part due to regulatory changes. At the same time, inflation remains elevated in some of the other components within this grouping. These include products for which labour costs are a significant share of the cost of production, such as personal care services and food purchased from restaurants.

Wages are typically negotiated once per year, so they tend to adjust slowly to changes in economic conditions. As wages and costs gradually change, they feed into prices, which also adjust infrequently.

The softening in labour market conditions has set the stage for labour cost growth to slow over the next year. This, over time, should lead to a gradual decline in inflation for the prices in this grouping that have experienced high inflation.

Inflation in shelter prices is slow to respond to market conditions

Shelter components in general have inflation that is well above their historical averages. Inflation for the rent component of the CPI, for example, is about 8% now, compared with roughly 3% in 2019. Two factors cause rent inflation in the CPI to adjust slowly:

• Rental contracts are typically renegotiated only once per year.
• Government regulations limit price increases for many renters who remain in their homes.

As a result, pressures in the rental market are passed on to the CPI rent component over time. This means that rent inflation will be relatively slow to decline, even as underlying market conditions improve.

Summary

The Bank of Canada expects inflation to remain close to the 2% target. The path for overall inflation reflects the evolution of goods and services prices, which tend to adjust to changes in economic conditions at different frequencies. Predicting the timing of these dynamics is challenging, and the evolution of inflation may not be as smooth as in the projection.