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Opinion: Don't blame immigration for inflation and high interest rates


By Michael Burt and Pedro Antunes 

In the 12 months ending in March 2023, Canada welcomed nearly 1.2 million new people, a record for a one-year period. For 2023, population growth is expected to surpass three per cent, a 65-year high. 

This influx has resulted in recent commentary about the merits of bringing so many new people into the country so quickly. Concerns have run the gamut from strains on housing and social services to decreased affordability, with some also blaming it for higher inflation. But immigration has not caused the surge in inflation or led the Bank of Canada to tighten monetary policy. In fact, immigration has alleviated extreme tightness in the labour market, a critical factor in limiting domestic inflation pressures.  

During the pandemic, immigration slumped, from an inflow of 531,000 in 2019, to just 88,000 in 2020. As we reopened the economy, spending and employment surged, workers retired and labour markets tightened to unsustainable levels. By the end of 2021, Canada’s economy had more than recovered from pandemic job losses, and by mid 2022, the unemployment rate had fallen to a record low of 4.9 per cent, while job vacancies surpassed a million.  

Inflation was also surging. At first from pandemic-induced effects (supply-chain problems, lagging oil production and unexpectedly strong demand for durable goods) and later from the commodity price surge that followed Russia’s invasion of Ukraine. The combined effects of rising inflation expectations and super-tight labour markets became a major concern for our central bank. Given the risk of a wage-price spiral, the Bank of Canada began a series of rapid and sharp interest rate hikes, knowing that inflation would not settle at two per cent with labour markets so tight.  

The central bank’s policy was intended to reduce consumer spending, as households were forced to devote more income to servicing their debt. That would in time hamper business revenues and hiring, eventually softening labour markets and easing pressures on wages. The Bank of Canada cannot affect commodity prices or snags in global supply chains. The rise in interest rates we’ve endured is aimed at solving a problem within our borders — employers facing a lack of workers that prevented them from increasing output as demand surged from the economy’s reopening.  

The rise in immigration has helped fix our labour market challenge in another way. Rather than beating back consumer spending to slow hiring, we added to the supply of labour. Over the past seven months, despite robust job gains, the unemployment rate edged up from 5.0 to 5.7 per cent in October. As well, job vacancies have fallen by nearly a third.  

Of course, immigration has also added to demand. Strong hiring supported income growth, and immigrants coming to Canada need places to live and spend money on all the necessities of life. This adds to demand pressures and is especially concerning for rental housing affordability. Such strength in underlying demographic demand is inflationary when there is so little slack in the economy. Taking in so many in such a short period of time has stretched our ability to provide settlement services, affordable housing  and other necessities. But there is also no doubt that the surge in migrants has alleviated massive labour market pressure and is thus deflationary.  

Without immigration, Canada’s labour force would be in decline, especially over the next five years as Canada’s baby boomers retire in growing numbers. Steady immigration adds to our productive capacity, our GDP and our tax take — enough to offset public-sector costs and modestly improve government finances. 

One thing is certain, if immigration is aligned with our capacity to welcome those who are arriving, it will continue to drive economic growth and enrich our society through diversity, as it has through most of our history. 

Mike Burt is vice president of The Conference Board of Canada and Pedro Antunes is the organization’s chief economist.