Canada’s annual inflation rate accelerated at its quickest pace in a decade, influenced by the frothy housing market and supply-chain woes in some industries.
The Consumer Price Index (CPI) rose 3.6 per cent in May from a year ago, up from a 3.4-per-cent gain in April, Statistics Canada said Wednesday. That was roughly in line with what analysts were expecting. Price growth accelerated in nearly all major product categories.
The durability of inflation is perhaps the biggest source of debate in economics today. U.S. Federal Reserve chair Jerome Powell said Wednesday that “inflation could turn out to be higher and more persistent than we expect,” on account of supply issues. As part of Wednesday’s rate decision, the Fed is now signalling two rate hikes by the end of 2023, pulling forward its timeline.
The Bank of Canada has repeatedly played down inflation concerns, saying that lofty results are largely due to transitory factors, such as a weak base from lower prices after the pandemic arrived. The bank expects inflation to stay around 3 per cent for many months, then fall back toward its 2-per-cent target later this year.
But on Wednesday, Statscan tamped down the role of base-year effects, noting they affected “only a few key goods and services” in May, such as gasoline, furniture and beef products.
As well, Canada has been seeing sturdy monthly inflation of late, despite continuing restrictions on some activities. Unadjusted for seasonality, monthly CPI rose 0.5 per cent in May, matching April’s gain.
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“We’re past the heating up stage now. Inflation in Canada is hot,” Toronto-Dominion Bank senior economist James Marple said in a note to investors.
“Base-year effects are only partly to blame for the acceleration,” he added.
The May inflation report was marked by broad strength.
Shelter prices rose 4.2 per cent in May from a year earlier, the largest annual increase since 2008. In particular, the homeowners’ replacement cost index – which is tied to the price of new homes – surged by 11.3 per cent, the largest 12-month gain since 1987. The increase was driven not only by hot demand from buyers, but rapidly rising costs of materials, such as lumber.
The price of durable goods increased 4.4 per cent from the previous May, the fastest pace since 1989. Passenger vehicles jumped 5 per cent, which Statscan said was partly because of supply-chain issues that have led to a global shortage of semi-conductor chips.
Furniture prices rose by a robust 9.8 per cent, although that was largely guided by steep discounts from a year back. Gasoline was up a sharp 43 per cent from last May, but slower than April’s 63-per-cent increase. Excluding gas prices, inflation rose 2.5 per cent over the past year.
The May results also brought early signs of reopening effects. Hotel prices jumped 6.7 per cent in May, accelerating from April’s 1.5-per-cent gain. Hotels in B.C. saw a 13-per-cent increase.
Rental vehicles remain a volatile area, with prices up 22 per cent from last year. Rental companies are trying to rebuild their fleets after selling vehicles when COVID-19 hit.
“The global economy shut down very rapidly but unevenly last year, and it’s been reopening also very rapidly,” Bank of Canada deputy governor Tim Lane said at a press conference last week. “And as it reopens you’ve got some imbalances, where certain things are in short supply, and so you do have upward pressure on prices of some of those important inputs.”
“At this point our baseline interpretation is that’s something that’s temporary,” he added.
The average of the Bank of Canada’s core measures of inflation – which strip out volatile components – was 2.3 per cent in May, year over year, accelerating from 2.1 per cent.
Last week, the U.S. reported annual inflation of 5 per cent in May, while the core index (which removes food and energy) tallied 3.8 per cent, the highest reading since 1992.
“While it’s still far too early to say whether firmer inflation is here to stay … the persistent strength is likely making the BoC a bit less comfortable with its extremely accommodative monetary policy,” Bank of Montreal rates strategist Benjamin Reitzes said in a report.
“Even so, looking through all the pandemic noise, CPI is up just 1.6 per cent annualized over the past two years. That should keep the BoC singing the transitory inflation tune for now.”
With a report from Mark Rendell
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Matt Lundy