Canada’s annual inflation rate hit its highest level in nearly a decade last month, as rebounding gasoline prices were compared with early pandemic lows, and a broad range of consumer prices increased even as much of the economy remained in lockdown.
The consumer price index rose to 3.4 per cent in April compared with the previous year, up from 2.2 per cent in March, Statistics Canada reported Wednesday. Inflation was up 0.6 per cent on a month-to-month basis.
Economists had expected a surge in the headline inflation rate, which is calculated on a year-over-year basis. Much of this was driven by a record 62.5-per-cent jump in gasoline prices compared with last April, when demand collapsed in the first wave of the pandemic. The “base year” effect of gas prices on the CPI will be temporary, Statscan said.
What caught observers by surprise, however, was the size of the month-to-month CPI increase, which is not explained by base-year effects.
“The surge in headline inflation should come as a shock to absolutely no one,” wrote Benjamin Reitzes, director of Canadian rates and macro strategist at BMO Capital markets.
“However, the breadth of the strength in CPI this month, when much of the country was in lockdown or under tightening restrictions, is notable. Many of the sectors reporting gains likely aren’t repeatable, but that doesn’t mean those types of increases won’t be seen elsewhere, especially as the economy reopens,” he wrote.
Shelter, clothing and health and personal care products all saw notable upticks in prices. The shelter component on the index rose 3.2 per cent, owing to a 9.1-per-cent jump in the homeowners’ replacement cost index, which tracks the price of new houses, including lumber costs. Excluding energy prices, CPI was up 1.6 per cent year-over-year.
The latest Canadian data were released a week after the United States reported 4.2-per-cent CPI growth in April. The U.S. inflation numbers rattled markets, and added fuel to growing concerns that high inflation could become entrenched as the economy reopens and consumer demand outstrips supply. Recent problems with supply chain bottlenecks and shortages of crucial manufacturing inputs such as semi-conductors has heightened inflation fears.
Royce Mendes, senior economist at CIBC Capital Markets, said Canada is likely to see considerable volatility in inflation numbers in the coming months, “particularly if the Canadian economy sees price pressures as it reopens similar to those in the U.S. "
“However, it’s still likely that this will all end up being transitory, and the Bank of Canada will be able to stick with its plan of keeping rates on hold until the latter half of 2022,” he wrote in a note.
The Bank of Canada, for its part, has consistently maintained that the near-term surge in inflation will be temporary. In a news conference last week, a day after the U.S. inflation numbers were released, Bank of Canada Governor Tiff Macklem reiterated the view that inflation would rise to around 3 per cent in the coming months, before declining toward the bank’s 2-per-cent target later in the year.
“Large parts of our economy remain very weak. There are far too many Canadians unemployed, and that is putting downward pressure on inflation,” Mr. Macklem said.
The central bank typically “looks through” short-term spikes in inflation for the purposes of conducting monetary policy. But it does become harder for the bank to control the narrative around inflation when CPI overshoots the top of its 1-per-cent to 3-per-cent target range.
“The [bank’s] clear pandemic-era emphasis upon not pulling back on the reins until we have a 110-per-cent inclusive recovery because we won’t get durable inflation until that point is being tested by persistent upsides to inflation tracking compared to what they thought would happen when all this stimulus was first put into place,” wrote Derek Holt, head of capital market economics at the Bank of Nova Scotia.
An average of the three core inflation measures favoured by the Bank of Canada rose to 2.1 per cent in April, which is the highest reading since 2012.
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