Canada’s inflation rate has slowed from its highest point of the past decade, but the country is still seeing hefty price increases for shelter and vehicles as it emerges from COVID-19 lockdowns.
The Consumer Price Index rose 3.1 per cent in June from a year earlier, down from 3.6 per cent in May, Statistics Canada said Wednesday. The year-over-year comparison was dulled by a price surge as Canada reopened in June, 2020. On a monthly basis, the CPI jumped 0.3 per cent.
The Bank of Canada’s core measures of inflation – which strip out volatile components – rose by an average of 2.2 per cent, matching the annual gain in May.
While June brought a slowdown in the overall CPI, it’s unlikely to quell a vigorous debate over the course of inflation, and the extent to which strong price gains prove temporary.
On multiple fronts, prices remain under pressure. Supply-chain troubles are resulting in shortages of vehicles, appliances and building materials. Canadians have billions parked away in deposit accounts, ready to spend as health restrictions ease. And companies say they’re planning to offset higher input costs by raising prices at the highest rates in years.
The Bank of Canada insists the recent acceleration is transitory, but expects annual CPI to remain above 3 per cent for the rest of 2021, and not return sustainably to its 2-per-cent target until 2024. Some forecasters are pencilling in price hikes of around 4 per cent in the coming months.
“Inflation remains elevated by any stretch of the imagination,” said Jimmy Jean, chief economist at Desjardins Securities. “The elements are still there for price pressures to be fairly robust.”
Shelter was a big contributor to June’s gain, with costs rising 4.4 per cent over the past year. In particular, the homeowners’ replacement cost index – which is tied to the price of new housing – increased 12.9 per cent, affected by voracious demand and higher building costs.
Transportation jumped 5.6 per cent. The auto market has been roiled by a global shortage of semiconductors, crimping production. Passenger vehicle costs rose 4.1 per cent in June on a 12-month basis, while car rental rates soared by 30 per cent as the industry tries to restock fleets.
At the same time, transportation has less of an influence than it used to. Statscan updated its CPI basket weights last week, with transportation now comprising 15.3 per cent of the whole (down from 19.7 per cent), owing to less spending on travel and commutes in the pandemic.
Statscan noted, however, that the CPI increase would have been the same under the old formula.
Gasoline prices jumped by 32 per cent in June, a weaker annual gain than in May, on account of base effects. Excluding gas, CPI rose 2.2 per cent over the past year.
The reopening effect was fairly muted in Wednesday’s report. Notably, clothing and footwear prices rose by 1.1 per cent in June, down from an annual gain of 3.9 per cent in May.
The slowdown “probably reflects the fact that retailers offered heavy discounts to shift the inventory they held when stores first closed in the winter,” Stephen Brown, senior Canada economist at Capital Economics, wrote in a note to investors.
Despite the recent run-up, Canadian inflation is running cooler than in the U.S., where the June CPI jumped 5.4 per cent, the largest annual gain since 2008. While Canada is experiencing price pressures for vehicles, it’s nowhere close to the U.S. situation, which saw the price of used cars and trucks soar 10.5 per cent in a single month.
“Part of the story might have to do with the strength of the Canadian dollar earlier this year, but the loonie was already beginning to cheapen in June,” Royce Mendes, senior economist at CIBC Capital Markets, said in a client note.
The coming months could bring some outsized gains. The Bank of Canada forecasts annual CPI inflation will hit a peak of 3.9 per cent in the third quarter, which runs from July through September.
In a recent paper, three Bank of Canada economists argued monetary policy should allow inflation to rise above the bank’s 2-per-cent target following recessions in which interest rates are at low levels, as a means of encouraging faster growth and an inclusive labour recovery. The research is not an official bank position.
The Bank of Canada has pledged to keep its policy rate at 0.25 per cent until the output gap in the economy closes, which it forecasts will happen in the second half of 2022.
With a report from Mark Rendell
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