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Canada’s inflation rate hit a new three-decade high in February as consumers faced an array of price increases, adding pressure on the Bank of Canada to tame the situation with a speedy course of interest-rate hikes.

The Consumer Price Index rose 5.7 per cent in February from a year earlier, up from 5.1 per cent in January, Statistics Canada said on Wednesday. That was the highest inflation rate since August, 1991, and it marked the 11th consecutive month that inflation has surpassed the Bank of Canada’s target range of 1 per cent to 3 per cent.

Households are feeling the pinch on several fronts. Shelter costs rose 6.6 per cent, for the largest annual increase since 1983. Groceries rose 7.4 per cent, the most since 2009. And gas prices jumped 6.9 per cent in a single month.

The average of the central bank’s core measures of inflation – which strip out volatile components and give a better sense of broad-based price increases – rose to 3.5 per cent, also the highest since 1991.

Around two-thirds of the goods and services that make up Statscan’s CPI basket are experiencing inflation of more than 3 per cent, showing how sticker shock is getting tougher to avoid.

“If it feels like everything is getting more expensive, it’s because it is,” Royce Mendes, head of macro strategy at Desjardins Securities Inc., said in a note to clients.

Central bankers have embarked on a lengthy process to tamp down inflation. The U.S. Federal Reserve raised its benchmark interest rate on Wednesday from record lows, and for the first time since 2018. The Bank of Canada did the same earlier this month. Financial analysts expect both central banks to raise borrowing costs several times this year and next.

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Throughout the pandemic, central bankers have consistently underestimated the scale and duration of inflation. The Bank of Canada in January projected that annual rates would average 5.1 per cent in the first quarter of 2022 – a forecast that is already short of reality. The U.S. inflation rate hit a 40-year high of 7.9 per cent in February.

The latest threat to consumer prices is the Russia-Ukraine war, which has led to surging costs for wheat, gasoline, fertilizer and other products, on fears of supply shortages. However, central bankers can do very little to calm volatility in global commodity markets, making the situation even more complicated.

Several analysts said on Wednesday that Canada’s inflation rate could reach – or exceed – 6 per cent in short order.

“Whether it’s a supply or demand shock is becoming less and less consequential,” said Jean-François Perrault, chief economist at Bank of Nova Scotia. The central bank is “behind the curve” on rate hikes “and they need to move aggressively to try and signal that they’re very serious about bringing inflation back to target.”

In a recent speech, Bank of Canada governor Tiff Macklem would not rule out a rate hike of 50 basis points later this year. (A basis point is 1/100th of a percentage point.) A hike of that magnitude has not happened since 2000.

A key concern is that consumers, who are sensitive to price increases at gas pumps and supermarkets, will begin to see steep inflation as a long-term reality.

Inflation can be self-fulfilling, in that companies set prices and workers negotiate wages in anticipation of expected costs. Their expectations of inflation over the next two years have risen substantially, but remain “well anchored” over a five-year horizon, the central bank has said.

Not everyone agrees. Scotiabank said on Tuesday that inflation expectations have already become unmoored. “As of late 2021, the [central bank’s] priority should have been squarely on inflation” rather than supporting the labour market, read the report, which was co-written by René Lalonde, a former research director at the Bank of Canada.

Scotiabank estimates the central bank’s key interest rate – now at 0.5 per cent – will end the year at 2.5 per cent, which is the quickest pace of rate hikes that a major bank is projecting.

That would heap pressure on a Canadian consumer who is loaded up on debt. The household debt burden – more formally known as the ratio of credit market debt to disposable income – rose to 186 per cent in the fourth quarter, the highest on record. The pandemic debt surge has been entirely driven by demand for residential mortgages.

Mr. Perrault said Canadians can handle a quick pace of rate hikes. The economy is growing quickly, highlighted by the addition of nearly 340,000 jobs in February, which took the employment rate back to prepandemic levels.

“Rates are rising in a remarkably strong growth environment,” he said. “To us, that means households are going to have much greater flexibility and greater ability to manage these higher rates than would be the case if inflation was going up and growth was not there.”

In February, consumers felt the impact of higher prices for dairy products, which rose 3.7 per cent from January. That stemmed from a decision last year by the Canadian Dairy Commission, a Crown corporation, to greatly increase the price that farmers receive for milk and butter, citing higher production costs. The decision was widely panned over its opaque nature and insensitive timing, given that grocery prices were already inflating quickly.

Food processors and retailers have passed on those higher costs, which took effect on Feb. 1. The price of fresh milk jumped 5.8 per cent, the fastest month-over-month pace since 1994, Wednesday’s report showed. Statscan noted that prices for all dairy products increased in February.

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