Canada's Inflation Shock Exposes Stark Income-Spending Divide

The recent inflation report from Statistics Canada might suggest that prices are rising across the board, and households are worse off as a result. However, this simplistic view overlooks an important nuance: income growth.

A study by Bank of Canada researcher Yaz Terajima found that when comparing income growth to spending growth, the picture is more complex. Over the 2020-2025 period, the average household's income gains outpaced its additional spending by about $900 per year relative to trend. However, this overall number masks significant swings from year to year.

The study found that in 2022, inflation hit a four-decade high, and spending grew faster than income for the first time since the pandemic began. This gap widened further in 2023, when additional spending outpaced income by $2,398 per year.

When breaking down the data by age, quintile, and homeownership status, the study reveals a 'K-shaped' divide, where one group pulls ahead of its pre-pandemic trend while another falls behind. The bottom three quintiles (the lowest 60% of households by income) were still running a deficit relative to trend in 2025, with the second-lowest quintile facing the steepest shortfall at $6,805 or nearly 7% of income.

Interestingly, homeowners faced a deficit of $1,817 in 2025, while renters came close to breaking even. This challenges the assumption that renting is the primary cause of affordability issues.