How the Covid-19 Omicron Variant will Increase Inflation

Posted on Friday 14 January 2022

Covid-19 Omicron Variant Will Increase Inflation

Inflation is currently at an 18-year high in Canada, which means you’re paying more this year for goods and services. In fact, whether it’s on your weekly shopping list, your monthly rental bill, or the cost of filling up your tank, you can expect to pay about 4 percent more on basic necessities like groceries, housing costs, and gasoline.

Inflation rises and dips naturally, but why is it so much higher this year? Not surprisingly, COVID-19 has had a tremendous impact on inflation. And it’s not just a problem in Canada – rates of inflation are rising in South America, Central and Eastern Europe, and in the United States.

There’s no doubt that COVID-19 has brought significant economic changes, and while widespread vaccinations have helped turn a corner, the Omicron variant is threatening to bring the globe back to the earlier days of the pandemic.

With inflation already at record highs from the first round of COVID-19, how will the Omicron variant affect inflation? It’s too soon to tell to really know what will happen in 2022, but here’s an overview of what the experts are saying could be on the horizon with Omicron and inflation.

We could expect renewed restrictions and lockdowns

One of the most significant worries over the Omicron variant is whether it can still make vaccinated people sick. The variant is still being studied, but it’s thought to be a highly contagious strain, and there’s some evidence that suggests it can evade the biological defenses put in place by vaccines (though booster shots should still be a good counter defense).

If Omicron spreads unchecked, global economies could be facing a renewed challenge similar to the beginning stages of the pandemic: how do we keep people safe and healthy while keeping the economy running?

Unfortunately, the best way to keep people safe will be to return to some version of pandemic restrictions and lockdowns. And both of those will inevitably impact inflation once again, exacerbating conditions that are already shaky at best. If you are working from home or have a regular income source, it may be a good idea to concentrate on savings, and use online payday loans wisely.

Lockdowns mean that people will be less inclined to spend money, whether it’s due to changes in employment or worries over what happens next – or even from the simple fact that typical spending habits will inevitably change without the usual entertainment, dining out, and travel options. With less money flowing into the economy, inflation rates are likely to rise.

As many of us have settled back into a renewed sense of normalcy, heading back into social distancing, masking, travel limitations, and restrictions on gathering indoors (or even with family members) will be a tough pill to swallow. If it’s what helps the country stay safe, most Canadians will once again get on board with recommended restrictions – but let’s face it, none of us would be looking forward to being cooped at home again.

We could experience increased labor shortages

Restrictions and lockdowns all have an effect on crucial pieces of the economy, such as labor demand and supply chain shortages. Labor, goods, and supply shortages are already at risk during the pandemic recovery period – and of the three, labor has been the toughest to fill.

In November, Reuters reported that filling labor shortages in Canada has been an issue “in every sector, at every level of the value chain, in every part of the country.” Companies that can’t get the skilled laborers that they need will be forced to make adjustments elsewhere, whether it’s in not producing as much as they typically would, or in delaying (even canceling) orders entirely.

That unfulfilled need for skilled labor (particularly in industries like retail, healthcare, hospitality, service, and construction) has a direct impact on the economy and on inflation. It drives the cost of available products and services higher, which is the exact definition of inflation. Meaning the more cash you have in your pocket, the better off you are going to be. So using your income and express loans maybe a good idea. And in a year where inflation is already at an 18-year high, an additional wave of labor shortages from Omicron could boost inflation even higher.

We could see a renewed interest in financial and social programs

If the Omicron variant is as dangerous as early predictions suggest, we may see an aversion to crowded offices and renewed demand for remote work. Of course, the truth is that not all jobs can be conducted virtually, meaning there could be another round of layoffs.

That means that the Canadian government will need to step in again to bolster the economy and keep paycheques coming in amidst increased demand for unemployment benefits. That’s an added cost to a government that is already strapped for cash. Recent estimates put daily spending at more than $1.5 billion per day.

Let that sink in for a moment: $1.5 billion is a huge number! But it’s a number that can easily be reached again when you consider all of the moving parts that come with keeping the economy running.

For example, the Canada Recovery Benefit (CRB) alone, which paid Canadians $2,000 per month to stay at home, ended up costing nearly double what it was expected. Instead of around $6 billion, final estimates put the cost of CRB at more than $11 billion.

With an economy that is still in recovery in what was hoped to be the final stages of the pandemic, adding another wave of CRB (and all of the related economic and social support programs) could be costly.

These early predictions might feel bleak, but there’s much that we have yet to learn about Omicron, how it spreads, and how it might affect inflation. Our best recommendation is to start putting together a financial plan (an emergency fund, a budget, and smart credit strategies) to ensure that another round of inflation doesn’t break the bank!