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Inflation hit a new three-decade high in January, heaping more pressure on the Bank of Canada to raise interest rates for the first time since the pandemic started.

The consumer price index rose 5.1 per cent in January from a year earlier, accelerating from December’s pace of 4.8 per cent and marking the first time since 1991 that inflation has surpassed 5 per cent, Statistics Canada said Wednesday. It was the 10th consecutive month that inflation has exceeded the Bank of Canada’s target range of 1 per cent to 3 per cent.

Central bankers face a formidable task in taming inflation, which is proving more durable than they once assumed. As such, the Bank of Canada is widely expected to start raising its benchmark interest rate from 0.25 per cent at the next opportunity, March 2.

Inflation has been a dominant theme of the economic recovery from the pandemic. Prices are rising for several reasons, including supply chain disruptions, labour shortages, robust consumer demand and ultralow interest rates that are driving rabid activity in the real estate market.

At the same time, average wages aren’t increasing at nearly the same pace, which means households are experiencing a decline in purchasing power.

It’s unlikely Canadians will get relief in the short term, several economists said Wednesday.

“The widespread nature of the price gains, including in many sectors that rarely see significant inflation, indicates that firms are readily able to pass on cost increases, especially at a time when consumer savings are relatively flush,” said Doug Porter, chief economist at Bank of Montreal, in a note to clients.

“With commodity prices still rolling, supply issues persisting, home prices afire and now wages stirring, it’s clear that the risks remain squarely to the upside on the inflation outlook.”

Canadians are feeling the pinch on several fronts.

Housing costs rose 6.2 per cent in January, the fastest annual pace since 1990. The homeowners’ replacement cost index – which is tied to the price of new homes – rose 13.5 per cent, propelled by higher prices for lumber and other building materials.

Grocery prices rose 6.5 per cent in January on an annual basis, quickening from December’s 5.7-per-cent pace. Fresh or frozen beef jumped 13 per cent, fresh fruit rose 8.2 per cent and bakery products climbed 7.4 per cent. Statscan pointed to inclement weather and higher shipping costs as some of the reasons.

The average of the Bank of Canada’s core measures of annual inflation – which strip out extreme price swings and give a better sense of underlying trends – rose to 3.2 per cent from 3 per cent, the highest since 1991.

Once again, inflation was higher for goods (7.2 per cent) than services (3.4 per cent), a reflection of pandemic shifts in consumer spending. That said, services inflation can be sticky, making it a potential area of concern as some sectors reopen and people divert more money to that side of the economy.

Canadians are feeling pain at the pumps, too. Gasoline prices increased 4.8 per cent in January alone and 32 per cent over the past year. Benchmark oil prices are nearing US$100 a barrel, in part because of heightened tensions between Russia and Ukraine.

“With energy prices continuing to rise, inflation is set to accelerate even further and is unlikely to materially slow down before April,” said Royce Mendes, head of macro strategy at Desjardins Securities, in a research note.

Throughout the pandemic, the Bank of Canada has revised its inflation forecasts higher. In its latest Monetary Policy Report, published alongside the January rate decision, the bank said it expected inflation to average 4.2 per cent this year, much steeper than October’s forecast of 3.4 per cent. It will ease to about 3 per cent by the end of the year, the bank estimated – a hefty upward revision from about 2 per cent just three months earlier.

After Wednesday’s report, Mr. Porter of BMO said he expects inflation to come in even higher, averaging 4.7 per cent this year.

“Simply put, this is far too hot for comfort for the Bank of Canada, so expect a steady series of rate hikes in the coming meetings – we look for four in a row to start, and it may well require much more than that to bring inflation to heel,” he said.

Traders are pricing in as many as seven rate hikes over the next year, which would take the bank’s policy rate to 2 per cent – 25 basis points higher than at the outset of the pandemic. (A basis point is 1/100th of a percentage point.)

Some analysts criticized the Bank of Canada for not hiking rates in January, given its declaration that the economy was back at full capacity, as well as rising expectations of higher inflation among businesses and consumers.

The bank has long maintained that expectations of lofty inflation are not becoming entrenched and thereby tougher to control. While the bank held rates steady last month, Governor Tiff Macklem made it clear this era of loose monetary policy is coming to an end soon.

“Everybody should expect interest rates to be on a rising path,” Mr. Macklem said at a news conference after the January decision. “A path is not one move. A path is a number of steps.”

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