Canadian inflation surged in July at the fastest pace in a decade, driven by a mix of rising housing costs and supply chain disruptions that have made affordability an issue in the first week of the federal election campaign.
The consumer price index rose 3.7 per cent in July from a year earlier, Statistics Canada reported Wednesday, up from 3.1 per cent in June. That’s the fourth consecutive month that the annual rate of inflation has exceeded the Bank of Canada’s target range of 1 per cent to 3 per cent, and it lands in the opening week of a campaign that rival parties to the Liberals are hoping to fight on issues such as housing affordability and the cost of living.
The jump in prices was widespread, with costs related to new homes, cars, furniture and gasoline all spiking compared with last year.
The Statscan report is a headache for Liberal Leader Justin Trudeau, who came under further criticism from political opponents for comments about monetary policy made Wednesday.
Mr. Trudeau was asked at a press conference whether he would change the Bank of Canada’s mandate if re-elected to permit more flexibility on its inflation target, which could provide additional monetary-policy stimulus coming out of recessions.
“I don’t know,” Mr. Trudeau said. “When I think about the biggest, most important economic policy this government, if re-elected, would move forward, you’ll forgive me if I don’t think about monetary policy, you’ll understand that I think about families.”
The central bank is due to renegotiate its mandate with the federal government later this year as part of a regular five-year review process. These reviews are typically a technocratic process that proceed at the direction of the central bank, with little political input from Ottawa.
Conservative Leader Erin O’Toole seized on Statscan’s inflation report at a Wednesday election stop in Quebec City, blaming Mr. Trudeau’s “spending … [and] economic approach” for boosting consumer prices and making life unaffordable.
Mr. Trudeau shot back from his news conference in Vancouver, saying that Mr. O’Toole can’t be “considered serious” on cost-of-living issues because of the Conservative proposal to scrap the Liberal’s subsidized child-care plan and replace it with family tax credits.
Affordability will likely be top of voters’ minds when they head to the polls for the Sept. 20 election. According to a poll conducted last month by Abacus Data on behalf of the Broadbent Institute, respondents ranked cost of living, health care and housing affordability as the top three issues that will drive their voting decisions.
Eighty-three per cent of respondents said they worry at least a little about their cost of living. The online survey was conducted with 1,500 Canadians and is considered to have a margin of error of plus or minus 2.6 percentage points, 19 times out of 20, Abacus Data said.
NDP Leader Jagmeet Singh also weighed in on the issue of affordability, saying in an e-mailed statement to The Globe and Mail that “Justin Trudeau’s housing crisis is one of the main drivers of inflation – which makes it even harder for everyday people to make ends meet.”
As in previous months, much of the CPI increase in July is the result of year-over-year comparisons to low prices early in the pandemic. But consumer price growth did broaden out notably in the month, suggesting widespread price pressure as the economy starts to reopen after health-related lockdowns and people begin spending on things such as restaurants and travel.
Prices increased faster in July than in June for six of the eight product categories tracked by Statscan. On a seasonally adjusted month-to-month basis, the CPI rose 0.5 per cent.
Despite the overshoot, the Bank of Canada is likely to continue to regard inflationary pressures as transitory and is unlikely to budge from its commitment not to raise its policy interest rate – currently at a rock-bottom 0.25 per cent – until the second half of 2022, several economists said.
The three “core” measures of inflation looked at by the Bank of Canada rose by an average of 2.47 per cent, the highest level since 2009. However, the “CPI-common” measure favoured by the central bank remained steady at 1.7 per cent.
“As a result, monetary policy makers won’t be in any more of a rush to remove stimulus simply due to this report. The central bank will continue to focus on supporting the labour market, particularly in light of the potential challenges on the horizon with regards to the virus,” Royce Mendes, senior economist at CIBC Capital Markets, said in a note.
The central bank said last month that it expects overall inflation to remain above 3 per cent for the remainder of the year, hitting an average of 3.9 per cent in the third quarter, before dropping close to 2 per cent next year. It is not expecting inflation to return sustainably to its 2-per-cent target until 2024.
The biggest driver of the CPI increase in July was shelter. The homeowner’s replacement cost index, which is tied to the price of new homes, rose 13.8 per cent compared with last year, the largest annual increase since 1987. Likewise, the index that tracks other expenses for owned accommodation, including commission fees for real estate sales, was up 13.4 per cent year over year.
“Housing became more inflationary during July and it’s not done yet,” Derek Holt, head of capital market economics at the Bank of Nova Scotia, said in a note. “Even though demand [for housing] has slowed, there is still very tight supply and so we may not see price relief for some time in this component of CPI.”
Meanwhile, the price of durable goods continued to move higher in July owing to supply chain disruptions around the world that are making it hard to source crucial manufacturing inputs as well as finished goods. The price of passenger vehicles rose 5.5 per cent, year over year, which Statscan said was “partially attributable to the global shortage of semiconductor chips.”
Upholstered furniture prices shot up 13.4 per cent year over year, as furniture importers continue to face supply chain disruption from manufacturers in Asia and much higher shipping costs. Statscan also pointed to new tariffs on furniture introduced in May as a possible contributor to the price increase.
“The pandemic’s effect on price growth is not only on the supply side, where production disruptions are adding to the cost of manufactured goods such as autos, but also on demand, where policy supports have driven robust spending on housing and durable goods items,” James Marple, senior economist at Toronto-Dominion Bank, said in a note.
“We are also now starting to see the impact of faster price growth in reopening services sectors such as restaurants,” he said.
Gasoline prices were up 30.9 per cent in July, compared with the previous year, driven largely by year-over-year comparisons to lower gas prices early in the pandemic. That price increase is slightly slower than in June.
The closely watched price of food rose 1.7 per cent in July, compared with the previous year, with restaurant food prices increasing 3.1 per cent and grocery-store prices increasing 1 per cent.
With reports from Ian Bailey and Kristy Kirkup
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