Canadian inflation hit a three-decade high in November as the economy deals with rapidly increasing infections tied to the Omicron variant of the coronavirus, threatening to worsen supply disruptions that have pushed up prices and become a top concern for households.
The consumer price index (CPI) rose 4.7 per cent in November from a year earlier, matching October’s rate, which was the highest in 18 years, Statistics Canada said on Wednesday. However, at the second decimal place, inflation of 4.72 per cent in November was the highest since 1991.
Gasoline prices have surged 44 per cent over the past year, having an outsized impact on inflation. When those prices are removed from Statscan’s calculations, inflation was 3.6 per cent, the same as October. Inflation has now exceeded the Bank of Canada’s target range of 1 per cent to 3 per cent for eight consecutive months.
Nearly two years into the COVID-19 pandemic, inflation is perhaps the hottest topic of discussion – and debate – in economics. The United States and Europe are also dealing with their loftiest price increases in decades, piling pressure on policy makers to respond.
While Canada’s economic recovery is progressing quickly – more Canadians are employed now than in February, 2020 – inflation is rising at a faster rate than average hourly wages, eroding the buying power of households. Opposition parties are seizing on that development to criticize the governing federal Liberals.
The Bank of Canada has long maintained that steeper inflation is largely driven by temporary factors related to the pandemic, such as disruptions in getting products manufactured and delivered to consumers. However, bank officials have acknowledged that supply woes are dragging on longer than they initially expected. Now, the Omicron variant – which has already led to tighter travel restrictions – poses another threat to supply chains in fragile shape, from factory closings to slower traffic at ports and borders.
“Worries about Omicron have contributed to lower oil prices, but beyond that, the restrictions on mobility necessary to fight the rapidly spreading variant will do little to help on the inflation front and may exacerbate price pressures in some areas,” James Marple, senior economist at Toronto-Dominion Bank, wrote in a note to clients.
“Supply chain disruptions are likely to be prolonged. Demand may take a hit, but with people staying home, it will be redirected toward goods, keeping upward pressure on already elevated prices.”
Wednesday’s report showed price pressures on a number of fronts. Notably, inflation has accelerated for groceries, reaching 4.7 per cent in November (from October’s 3.9 per cent). It was the largest annual increase since the outset of 2015. Prices for fresh or frozen beef rose 15.4 per cent, owing to summer drought conditions in the Prairies that made it more expensive to feed livestock.
The average of the Bank of Canada’s core measures of inflation – which strip out extreme price swings and give a better sense of underlying trends – rose slightly to 2.73 per cent, also a 30-year high.
As inflation persists, the messaging at central banks has shifted.
The Bank of Canada dropped a reference to the drivers of inflation as temporary in last week’s rate decision, which kept its benchmark lending rate at 0.25 per cent. Similarly, U.S. Federal Reserve chair Jerome Powell recently said it was time to retire “transitory” as a description of high inflation.
Regardless, the Bank of Canada still expects inflation to ease in 2022, to about 2 per cent by the end of the year. It has indicated rate hikes could start as early as April. The Fed took a hawkish turn on Wednesday, speeding up the timeline to end the purchases of government bonds it undertook to support the pandemic economy, and Fed officials are signalling three rate hikes next year.
Bank of Canada officials are watching for signs that lofty inflation becomes entrenched.
“If supply disruptions and related cost pressures persist for longer than expected and strong goods demand continues, this would increase the likelihood of inflation remaining above our control range,” deputy governor Toni Gravelle explained in a speech last week.
Mr. Gravelle alluded to a wage-price spiral, in which workers demand higher wages to counter price increases. Faced with higher labour costs, companies raise prices to protect their margins. Then, workers push for higher wages again, creating a vicious cycle.
Despite those concerns, bank officials say inflation expectations aren’t troubling over the mid- to long-term, based on surveys of businesses and consumers.
There are, however, signs of pressure in the short term. Small businesses plan to raise prices by an average of 4.3 per cent over the next year, the highest in more than a decade of records, according to survey results from the Canadian Federation of Independent Business. Nearly one-third of companies are planning to hike prices by 6 per cent or more.
The release of the inflation data was affected by website issues for Statscan. Because of a cybersecurity threat, the statistics agency is running a pared-back version of its website after outages on the weekend. As a result, the inflation report was delayed slightly on Wednesday morning and not published through the usual channels.
“There has not been any breach or compromise to our systems,” Statscan says on its site.
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