Why is inflation so bad in Atlantic Canada?

Inflation is running above 3% in eight Canadian provinces, with Atlantic Canada facing some of the strongest price pressures as rising energy costs and housing expenses widen regional differences in the cost of living, according to RBC Economics.

In a Nov. 12 report, RBC economist Salim Zanzana said Canada’s headline inflation rate, which has hovered around 3% for the past six months, conceals substantial differences between provinces. Inflation ranged from 2.5% in Ontario to 5.7% in Prince Edward Island in September, a gap of 3.2 percentage points.

Zanzana attributed much of the difference to rising global energy prices, which have had a disproportionate impact on Atlantic Canada. Energy represents a larger share of consumer spending in the Atlantic provinces, while the region’s greater reliance on heating oil makes households and businesses particularly vulnerable to price increases.

Gasoline and fuel oil prices have also increased more quickly in Atlantic Canada than elsewhere, adding to regional inflation pressures.

However, Zanzana said housing costs and other provincial factors are contributing to the disparity.

Ontario’s softer housing market has helped limit rent increases, while stronger conditions in Atlantic Canada, Quebec and the Prairie provinces have sustained pressure on shelter costs. Year-over-year rent increases averaged approximately 2% in Ontario over the past three months, compared with more than 6% in every Atlantic province.

Alberta faces additional pressures from rising automobile insurance costs. Passenger vehicle insurance premiums increased approximately 23% year-over-year in September, adding 0.77 percentage points to Alberta’s inflation rate, nearly matching gasoline’s contribution of 0.84 percentage points. Since the end of 2022, Alberta automobile insurance premiums have increased 58%, more than twice the national average of 26%.

Zanzana said higher living costs are increasingly straining household finances, particularly in Atlantic Canada, where inflation is outpacing wage growth. Although consumer spending has remained relatively resilient, sustained price increases could force households to reduce discretionary purchases or draw on savings, weakening economic activity.

Businesses in Atlantic Canada also anticipate greater input cost pressures than those in other regions. Zanzana said companies face declining profitability if they absorb higher costs, while passing them on to customers risks reducing demand. These pressures could further weaken business investment, which is already subdued.

Provincial governments face similar challenges as rising costs increase operating expenses, infrastructure spending and expenditures on inflation-indexed programs.

Zanzana believes persistent regional inflation differences also complicate the Bank of Canada’s interest rate decisions.

Higher interest rates could help contain inflation in provinces experiencing stronger price pressures, but could further weaken economic activity in Ontario and British Columbia, where inflation is less pronounced.

Below: Inflation is Heating Up in Atlantic Canada…

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