During the pandemic, inflation soared. It was the first time in more than a generation that prices had risen so quickly. In the three decades before the pandemic, inflation remained steadily around two per cent in Canada — the level that central banks seek to maintain to promote a vibrant economy. But the pandemic snarled supply chains, shifted consumer demand and disrupted labour markets, sending inflation soaring to a peak of more than eight per cent in June 2022. Prices climbed higher for just about everything, but people really felt the pinch at the grocery store. It was the first time that many Canadians had ever felt the bite of prices rising so rapidly. 

But even as prices were rising, wages were rising too. Between 2019 and 2024, the average weekly wage in Canada rose nearly 25 per cent, according to Statistics Canada. While not universally true, for many, the growth in their wages was more than enough to offset the increase in prices. But it doesn’t necessarily feel that way.

“Inflation measures the change in prices year over year, and in that sense, it has returned to a more normal level,” says Kristen Duke, an assistant professor of marketing and research fellow at the Behavioural Economics in Action at Rotman (BEAR) centre. “But what people are experiencing is not necessarily the year over year. Psychologically, many perceive prices should be at their pre-pandemic levels, and there has been a monumental shift in prices over the past five years.”

It is not surprising to a behavioural economist like Duke that consumer perception is anchored in the past. The phenomenon can be explained by a fundamental concept in the field: reference dependence. People evaluate everything based on their expectations or beliefs about what it should be. If someone has an existing belief that a bag of spinach should cost $2, they get sticker shock when it costs $2.50. And when you multiply that effect over the contents of an entire shopping cart, the final bill can seem like it is far more than it ought to be.

“We have an attachment to what we could afford before,” says Duke. “It is part of our beliefs and our expectations. And if we suddenly cannot afford what we could buy before, it feels like something is being taken away from us, and that can be really painful. It feels worse, even though we end up at the same position.”

For the sense of pain to alleviate, consumers need to develop a new set of reference points. That process takes time, and it requires a period of price stability.

“Unpredictable prices make it harder for consumers to form stable expectations about what things should cost,” Duke says. “Inflation has stabilized over the past year, and if prices remain relatively stable for a while, a sense of normalcy can seep back into consumer expectations and beliefs. Once we have a sustained period of more consistent prices, it can lead to more stable consumer expectations. But if we see more price swings and continued unpredictability over the coming year, which is already happening with the ongoing tariffs situation, it will take much longer for consumers’ expectations to recalibrate.”

Even as inflation slows, some prices come down, and wages rise, the feeling that prices are rising too quickly can remain. To explain this sentiment, Duke cites another key concept in behavioural economics: loss aversion.

“We become emotionally attached to what we could afford before,” says Duke. “It shapes our beliefs about what we deserve and what we expect we can afford. When inflation suddenly makes those same things unaffordable, it feels like something is being actively taken away from us. Experiencing that loss can be quite painful. It feels worse than never having been able to afford those things in the first place, even if the end result is the same purchasing power.”

If the price of an item goes up 10 per cent and wages also go up 10 per cent, the affordability of that item has not really changed. But psychologically, the higher cost feels like more of a loss than the higher wage feels like a gain, even though consumers are still able to afford the item in question.

But when it comes to pandemic inflation, there is something more at play. Prices are not just about affordability. They are also about trust. And for some, there is a lingering sense of injustice about how quickly prices rose and whether they needed to rise so much at all — a sense that inflation was driven more by greed than by necessity.

“During the pandemic, price hikes did not always feel like they were justified, and they were not always well-explained to consumers,” says Duke. “Early on, there was crazy inflation, and it disrupted consumers’ relationships with the stores where they shop. People felt like the rug was being pulled from beneath their feet. Many consumers trusted prices were fair, but those prices suddenly felt much less so. There was a feeling of betrayal — that stores are just trying to take money from me. That sense of unfairness can lead consumers to be more skeptical and more worried about rising prices.”

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