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A man shops for groceries at Toronto’s St. Lawrence Market, on May 18.Fred Lum/the Globe and Mail

Canadian inflation jumped to the highest rate in nearly four decades in June, although there were tentative signs that consumer price growth is close to topping out.

The consumer price index (CPI) rose 8.1 per cent in June from a year earlier, up from 7.7 per cent in May, Statistics Canada said on Wednesday. It was the highest inflation rate since January, 1983. Financial analysts were expecting a loftier reading of 8.4 per cent.

The acceleration was mainly because of gasoline, Statscan said. Consumers paid 6.2 per cent more at the pump in June than May, and 55 per cent more on an annual basis.

However, crude oil has tumbled in recent weeks, which has started to be reflected in retail pricing. The national average price for regular unleaded gas was $1.87 a litre on Tuesday, down from a peak of $2.15 in early June, according to data from Kalibrate Technologies.

Blame America: Why Canada’s steep inflation isn’t entirely our fault

Excluding food and energy, inflation rose 0.4 per cent in June from May, a slower pace than in recent months. And in a separate report on Wednesday, Statscan said that prices for industrial products fell 1.1 per cent in June, the first monthly decline since last summer. Softwood lumber fell 28 per cent in a single month, partly because of slowing U.S. construction.

“We may be at or very close to a peak. It’s too early to say,” Derek Burleton, deputy chief economist at Toronto-Dominion Bank, said in an interview. “This will bring some relief to the Bank of Canada, but they’re still looking at inflation that’s far too high.”

Central bankers are raising interest rates at the quickest pace in decades in their attempt to tame inflation. In less than five months, the Bank of Canada raised its policy rate to 2.5 per cent from 0.25 per cent. Just last week, the bank hiked rates by a full percentage point – the largest move since 1998. More hikes are coming, bank officials have indicated.

Despite signs of progress in the inflation fight, other aspects of Wednesday’s report were less encouraging. The average of the Bank of Canada’s core measures of inflation – which remove outlier changes in the CPI, such as gasoline – rose to 5 per cent from 4.9 per cent.

The cost of passenger vehicles rose 8.2 per cent in June from a year earlier, up from 6.8 per cent in May. Statscan said demand for automobiles is still outpacing supply as car producers struggle to procure semiconductors, putting upward pressure on prices.

The summer travel boom is leading to an explosion in prices. Accommodation rates were up 50 per cent on an annual basis. Airfares jumped 6.4 per cent in June alone.

“We’re still seeing pent-up demand getting released,” said Claire Fan, an economist at Royal Bank of Canada. Despite a rapid increase in travel costs, “people seem to be willing to spend that money” after two-plus years of public-health restrictions.

Mr. Burleton warned that services are the “stickiest aspect” of CPI. He pointed to rising rents in a “drum tight” housing market, along with higher debt-servicing costs. Mortgage interest payments jumped 1.4 per cent in June, the largest monthly increase since 1982.

“I clearly see big upward pressure there” with mortgages, Mr. Burleton said.

On the other hand, food is potentially close to a turning point. Grocery prices rose 9.4 per cent in June from a year earlier, slowing from 9.7 per cent in May. Sylvain Charlebois, director of the Agri-Food Analytics Lab at Dalhousie University, said that food inflation may have peaked.

“If nature continues to co-operate, Canada’s agricultural sector should see a strong harvest this year, helping to keep commodity prices lower and costs down,” he wrote in a memo on Wednesday. “Again, more good news.”

In an interview with CTV News on Wednesday, Bank of Canada Governor Tiff Macklem said the July inflation rate “probably will come down a bit” because of lower gas prices this month. “Unfortunately, inflation is probably going to start with a 7 for the rest of the year. It is going to be painfully high.”

Forecasting inflation has proved quite difficult for policy makers. For example, in April of 2021, the Bank of Canada projected CPI growth of just 1.9 per cent in 2022. As inflation was picking up last year, central bankers in Canada and elsewhere said it would prove transitory.

Instead, consumer prices continued to escalate, and high inflation broadened to more products and services. The Bank of Canada now expects inflation of 7.2 per cent this year and 4.6 per cent in 2023, having revised its CPI forecast higher several times.

In its latest Monetary Policy Report, the Bank of Canada attributed a large portion of its forecasting error to high commodity prices, such as crude oil, that it didn’t anticipate. It also underestimated supply-chain disruptions and the extent to which consumers would buy goods with many services shuttered by the pandemic.

Errors in forecasting are problematic. Because it takes a while for changes in interest rates to trickle through the economy, central bankers need a somewhat accurate view of inflation when setting policy.

Now, central-bank officials are playing catch-up and raising rates aggressively to curb inflation that is significantly worse than expected. Last week, Mr. Macklem said the path to a “soft landing” – in which inflation is brought under control without causing a recession – is narrowing.

“It’s really hard to not see a moderate contraction in the economy,” said Ms. Fan. RBC is the sole major bank in Canada to project a recession by 2023, though not a severe one by historical standards.

If consumer price growth starts to ease, it could still be a lengthy journey back to desired levels: the Bank of Canada doesn’t expect inflation to return to its 2-per-cent target until the end of 2024.

“Most of the heavy lifting on lower inflation is going to be a 2023 story,” Mr. Burleton said.

Interest rates and inflation are closely linked, which is why the Bank of Canada has been pushing up its key rate to try and keep inflation to a target of 2%. But it’s a careful balance between controlling inflation and not tipping the economy into a recession. Note - since this video was published in June, inflation has risen to 8.1% in July.

The Globe and Mail

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