Inflation rose 2.2 per cent in March 2021 compared to March 2020, according to Statistics Canada. Month-to-month inflation rose 1.1 per cent in March over February.
These new figures appear against the backdrop of concerns that inflation will rise as the COVID-19 pandemic subsides. But an analysis of the recent numbers points out that a large share of this increase reflects the base-year effect. It refers to the impact that price movements from 12 months earlier have on the current month’s headline consumer inflation. The start of the pandemic in March 2020 caused a broad decline in various categories, leaving room for significant gains 12 months later.
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This is certainly the case when looking at gasoline prices. Compared to March 2020, gasoline prices in March 2021 rose 35.3 per cent. “About one-fifth of the acceleration in the gasoline index is the result of this base-year effect, while one-third comes from the current effects influencing price change from February to March 2021,” it reads.
Housing costs as measured by homeowners’ replacement cost and other accommodation expenses rose 7.9 per cent and six per cent respectively. Overall, shelter prices rose 2.4 per cent on a year-over-year basis in March, even as mortgage rates have been dropping.
This base-year effect also works the other way. Clothing for women and men (no need to dress up while working from home) dropped 8.3 and seven per cent respectively, while accommodation costs while travelling dropped 17.2 per cent in March 2021 compared to March 2020.
This base-year effect is temporary. “In the coming months, the price declines observed in March and April 2020 will fall out of the 12-month price movement,” it reads. “Users should consider the impact of base-year effects when interpreting the 12-month price movement in the coming months.”
In other words, any future warnings about inflation should be read with the caveat that these increases might in part reflect a return to the status quo prior to the pandemic.
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