Canadian Inflation Shows No Signs Of Abating

Inflation at 6.8% is unmitigated bad news. The Bank of Canada looks flat-footed again, having forecast that Inflation would be at least a full percentage point lower by now. What’s worse, inflation looks likely to rise again this month given the surge in gasoline prices from April to May.

Today’s report raises the urgency for policymakers to withdraw stimulus from the economy quickly. Look for another 50 bp rate hike on June 1 and again in July. Markets are pricing in an overnight rate as high as 3% by the end of the year. It is currently at 1%.

In April, Canadian consumer prices rose 6.8% y/y, up slightly from March’s 6.7% pace despite a slowdown in the pace of gasoline inflation. The April inflation rise was driven mainly by food and shelter prices. Excluding gasoline, the CPI rose 5.8% in April, after a 5.5% gain in March. This was the fastest pace since the introduction of the all-items excluding gasoline special aggregate in 1999.

Since late February, Russia’s invasion of Ukraine has boosted energy, commodity, and, most notably, food prices.

The Canadian economy’s strength has added to inflation pressure. The unemployment rate is at a record low. Average hourly wages rose 3.3% y/y last month. With prices rising faster than wages, Canadian families are experiencing reduced purchasing power.

In April, Canadians paid 9.7% more for food purchased from stores compared with April 2021. This rise, which exceeded 5% for the fifth month in a row, was the most significant increase since September 1981.
In April, shelter costs rose 7.4% y/y, the fastest pace since June 1983, following a 6.8% increase in March. Higher prices for energy sources used to heat homes, such as natural gas (+22.2%) and fuel oil and other fuels (+64.4%), contributed to the rise.

Reflecting the dynamic Canadian housing market, homeowners’ replacement cost (+13.0%) is related to the price of new homes and other owned accommodation expenses (+17.2%), which include commissions on the sale of real estate; both rose sharply in April.

The mortgage interest cost Index (+0.2%) increased on a m/m basis for the first time since April 2020.

Rent prices increased in April (+4.5%) compared with the same month in 2021. The rent hike was mostly driven by price increases in Canada’s most populous provinces: Ontario (+5.3%), Quebec (+4.3%) and British Columbia (+6.4%).

While monthly, Inflation slowed in April (0.6%) compared to March (1.4%), the surge in gasoline price in May portends continued high Inflation in next month’s CPI report.

Bottom Line

Bloomberg News reported this morning that “The inflation surge has made the Bank of Canada a target of criticism, with some politicians accusing Macklem of moving too slowly. Immediately after the inflation data was published, Conservative leadership candidate Pierre Poilievre released a statement reiterating he plans to fire Macklem should he ever win power.”

The pressure is on for more rate hikes. Central banks all over the world are under similar pressure. Central bank tightening will slow demand, as we have seen already in the Canadian housing data for March and April. It does not address the supply disruptions that are the root cause of much of the inflation pressure.