Canadian inflation hit a three-decade high in December ahead of a hotly anticipated decision from the Bank of Canada that could see the central bank start to raise interest rates next week to rein in price growth.
The Consumer Price Index rose 4.8 per cent in December from a year earlier, accelerating from 4.7 per cent for November and marking the quickest pace since 1991, Statistics Canada said Wednesday. It was the ninth consecutive month inflation has exceeded the Bank of Canada’s target range of 1 per cent to 3 per cent.
The average of the bank’s core measures of annual inflation – which strip out extreme price swings and give a better sense of underlying trends – rose to 2.9 per cent from 2.7 per cent, also the highest since 1991.
Prices are being pushed up for many reasons, including supply chain disruptions that have stymied global trade the past year, adverse weather, labour shortages and rampant consumer demand. Lofty inflation has become a top concern for households and a frequent source of debate among politicians in Ottawa.
The situation has put greater focus on the Bank of Canada. The bank has previously signalled it could start raising its benchmark interest rate – now at a record low of 0.25 per cent – as soon as April. However, a slew of recent data suggest high inflation is at greater risk of becoming entrenched and tougher to tame.
For that reason, some financial institutions project the Bank of Canada will begin its hiking cycle on Jan. 26, casting aside the uncertainty posed by the Omicron variant. Those institutions include Bank of Nova Scotia, which pulled forward its timeline for rate hikes on Wednesday; it expects the Bank of Canada’s policy rate to reach 2 per cent by year’s end. Bond markets are pricing in six hikes in 2022, taking the rate to 1.75 per cent.
Strong demand is “exceeding the capacity of the economy to produce,” Scotiabank chief economist Jean-François Perrault said in an interview. “If you’re able to tamp down demand a little bit, you reduce inflationary pressure, because you’re reducing the amount of things that people want to buy.”
Once again, Statscan’s report showed Canadian households are dealing with widespread price increases.
Groceries rose 5.7 per cent in December for their largest annual gain since 2011, which Statscan attributed to supply issues and unfavourable weather. New border restrictions on unvaccinated truckers are already affecting shipments of produce and other food items, executives say, which could drive prices higher still.
Durable goods, which households use continuously for years, also rose 5.7 per cent. Refrigerators and freezers (13.9 per cent) and laundry and dishwashing appliances (10.4 per cent) saw particularly steep increases. The pandemic has led to robust demand for household goods, though manufacturers have struggled to keep up with orders.
“Demand has been every bit as much of the story of this inflation push as supply,” said Doug Porter, chief economist at Bank of Montreal. “Central banks can certainly work on the demand side of the equation.”
Gasoline prices fell 4.1 per cent in December, the largest monthly decline since April, 2020. However, oil prices have rallied in January, leading to renewed inflation at the pumps.
Shelter costs, meanwhile, jumped 5.4 per cent over the past year. There was a 9.3-per-cent spike in home and mortgage insurance costs, which Statscan said may have been partly attributable to an increase in the frequency and severity of weather-related claims due to fires and flooding.
Of late, there have been many troubling signs for the inflation outlook. The Bank of Canada published survey results on Monday that found businesses and consumers expect lofty inflation to drag on longer than they previously did.
Consumers expect inflation of nearly 5 per cent a year from now, and just over 4 per cent in two years – marked accelerations from just a few months earlier. Two-thirds of companies, meanwhile, expect inflation to remain above 3 per cent for the next two years.
Expectations are important, because inflation can be self-fulfilling. In anticipation of higher costs, companies may raise prices and workers may negotiate better wages, thus driving up inflation. The Bank of Canada and other central banks look to keep those expectations in check – a challenging task as high inflation persists.
Despite Monday’s findings, the Bank of Canada said long-term expectations of inflation were “well anchored,” as companies and consumers foresee price growth eventually waning.
Even so, the surveys provoked a reaction on Bay Street, with many banks moving up their forecast start dates for Bank of Canada rate hikes. Bond markets are indicating there’s an 85-per-cent chance of an increase next week, although some financial analysts believe the central bank will wait until the following decision on March 2.
“You have hospitals that are overflowing” and job disruptions in the Omicron wave, said Jimmy Jean, chief economist at Desjardins Securities. “Six weeks doesn’t make a lot of difference when you’re talking about controlling inflation.”
The “biggest factor” driving central-bank decisions, Mr. Porter said, is the “dramatic pivot” by the U.S. Federal Reserve to unwind stimulus in accelerated fashion, with rate hikes now expected to start in March. Last week, the U.S. government reported that annual inflation hit a 40-year high of 7 per cent.
“With the Fed changing the ground rules so abruptly, it does definitely give the Bank of Canada more leeway to start moving [on interest rates] as well,” he said.
Scotiabank’s Mr. Perrault said it was important to consider the broader economic context in which rates are poised to rise.
“We wouldn’t be talking about this if firms were laying off workers, if Canadians didn’t have any money to spend [and] if the global economy hadn’t performed as well as it had,” he said.
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