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The effects of higher interest rates in 2024 may have worsened the income gap between the top 40 per cent and the bottom 40 per cent of households in the second quarter of the year, according to Statscan’s latest household numbers.

The share of disposable income between households in the top 40 per cent and the bottom 40 per cent of the income distribution surged to 47.0 percentage points, the largest gap ever recorded since Statistics Canada started collecting data in 1999.

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Maria Solovieva, an economist at Toronto-Dominion Bank, pointed to a recent report from the Office of the Parliamentary Budget Officer, which highlighted how rising inflation and tighter monetary policy has eroded purchasing power, particularly among lower-income households, since 2022.

The report found that households in the highest income quintile have seen the most intense rise in income before taxes (32 per cent) dating back to the last quarter of 2019, especially since they are “the only income group whose higher investment income contributes the most to private income growth, after wage gains.”

Solovieva explained higher-income households benefit from higher interest rates boosting their financial assets, with higher yields on their saving and investment accounts.

The Statistics Canada release indicated the average disposable income for the highest income households ballooned at a faster-than-average pace in the second quarter of 2024 compared to the same quarter last year (7.6 per cent), as growth in investment income exceeded the increase in interest paid on mortgages and consumer credit.

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Meanwhile, lower-income and middle-income households were more likely to take a hit from higher borrowing costs and were less likely to see gains in their saving and investment accounts outstrip interest paid, since they tend to have less disposable income to set aside.

However, the lowest income households at the bottom 20 per cent of the income distribution still saw above average growth in disposable income compared to the second quarter of last year.

“It’s worth noting that the widened income gap has occurred even as wage gain has been the highest among low-wage earners,” wrote Tu Nguyen, economist with assurance, tax and consultancy firm RSM Canada, in an email. These wage gains stemmed mostly from service sector jobs, such as health and education and professional and personal services.

“Meanwhile, many higher-paid workers, such as those in tech, finance, and professional services, have had to take a pay cut after layoffs,” Nguyen said.

The data shows most households actually improved their average net saving in the second quarter of 2024 compared to the same period last year, due to easing cost-of-living pressures.

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For example, the highest income households had the largest year-over-year increase in net saving ($2,166). And the bottom 40 per cent of the income distribution made headway reducing the gap between their spending and what they had available as disposable income as their income grew.

But middle-income households saw the gap between their spending and available income grow wider, as they grappled with high housing and utility costs.

“They are more burdened by debt, and they are also feeling more pressure from inflationary price growth,” Solovieva said, explaining these factors are weighing on middle-income household savings.

Nguyen said that, while future rate cuts will provide relief for middle-class mortgage holders, wage gains are expected to slow down as the job market continues to cool.

“Even though inflation has reached two per cent, overall price levels are permanently higher than from a few years ago,” Nguyen noted. “This is a new reality that lower-income and middle-class households have to face moving forward.”

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