Canadian inflation surges in June as pandemic lockdowns ease

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Canada’s inflation rate surged in June, as the reopening of more of the economy after COVID-19 shutdowns pushed consumer prices back into positive territory.

Statistics Canada reported Wednesday that the consumer price index (CPI) was up 0.7 per cent year over year, a sharp reversal from the declines of 0.4 per cent in May and 0.2 per cent in April. It was the biggest increase in the annual inflation rate in nine years.

But despite the rebound, economists said prices have a long way to recover, in an economy that looks to be significantly weakened for many months to come by the fallout from the pandemic.

“The sudden snap-back in CPI is a glass-one-third full, two-thirds empty story,” Bank of Montreal chief economist Douglas Porter said.

The index surged 0.8 per cent from May to June, as the easing of pandemic-containment restrictions triggered rebounds in prices for consumer goods, which had slumped amid a dearth in demand during the lockdowns. The biggest contributor was gasoline, which jumped 10.5 per cent from May. Excluding energy prices, CPI was up 0.4 per cent month-over-month.

Among the leading categories for price gains in the month were clothing and footwear, as stores in many provinces reopened. Beef prices also surged, reflecting COVID-related shutdowns and production slowdowns at several meat-processing plants.

The return of inflation to positive territory should ease the biggest worry among policy makers at the Bank of Canada, as well as many economists, that the severe economic downturn triggered by the pandemic would bring with it a bout of deflation – a persistent decline in prices, which is highly damaging to growth prospects. The central bank’s three measures of core inflation – designed to filter out transitory volatility in some components of CPI to get a better picture of underlying price pressures across the economy – ranged from 1.5 per cent to 1.9 per cent. That’s up slightly from May and comfortably within the bank’s target band for inflation of 1 per cent to 3 per cent.

However, economists expect inflation to remain tepid, and below the Bank of Canada’s sweet spot of 2 per cent, for a long time. While disruptions to global trade flows resulting from continuing pandemic concerns could keep producers’ supply chains under strain and put some upward pressure on prices, the bigger issue is an economy that is now running well below its capacity, as the crisis has depleted incomes and employment, leaving a sizable hole in demand.

“As the economy continues to reopen, inflation should remain in positive territory. That said, the significant slack that is expected to persist will create an underlying drag on the pricing environment for businesses,” Royce Mendes, senior economist at Canadian Imperial Bank of Commerce, said in a research note. “As a result, while any fears of deflation appear premature at this point, the economy will likely only be generating modest rates of inflation, even with some supply-chain disruptions.”

Throughout the pandemic, Statistics Canada has been concerned about distortions to the consumer price index, as mass closing of businesses and even entire consumer sectors have created complications in gathering and measuring prices, while dramatic shifts in shopping patterns have changed the mix of goods and services that the typical consumer has been buying. The statistical agency published a report last week providing an analysis of inflation adjusted for the consumer shifts caused by the lockdowns, indicating that the standard CPI measure had probably slightly understated true inflation during the lockdowns, by about 0.2 to 0.3 percentage points.

But even assuming a similar understatement for June, that still implies that inflation is at or below the bottom of the Bank of Canada’s comfort range.

“Whatever the measure, inflation remains well below target,” Mr. Porter said.

With the central bank having pledged to keep its key interest rate at the current record low of 0.25 per cent until inflation has sustainably returned to 2 per cent, most economists expect that the tepid inflation outlook will likely keep borrowing rates very low for at least the next year, perhaps longer.

“We suspect inflation likely ticked up a bit further in July, as more businesses reopened and faced higher costs along with pent-up demand. Whether this ultimately leads to true, lasting inflation is still very much an open debate,” Mr. Porter said. “We tend to think ‘no,' but that answer may well depend on just how far fiscal policy [government spending] will need to go to support the economy in the year ahead, and that ultimately depends on the path of the virus.”

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