Canada’s Inflation Rate Skyrockets to 7.7%, Largest Increase Since 1983
Canadians continued to feel the impact of rising prices in May as consumer inflation rose 7.7% year over year. This was the largest yearly increase since January 1983 and up from a 6.8% gain in April.
Excluding gasoline, the CPI rose 6.3% year over year in May, after a 5.8% increase in April. Price pressures continued to be broad-based, pinching the pocketbooks of Canadians and in some cases affecting their ability to meet day-to-day expenses.
The acceleration in May was largely due to higher prices for gasoline, which rose 12.0% compared with April 2022 (-0.7%). Higher prices for services, such as hotels and restaurants, also contributed to the increase. Food prices and shelter costs remained elevated in May as price growth was unchanged on a year-over-year basis.
On a monthly basis, the CPI rose 1.4% in May, following a 0.6% increase in April. On a seasonally adjusted monthly basis, the CPI was up 1.1%, the fastest pace since the introduction of the series in 1992.
Wage data from the Labour Force Survey found that average hourly wages rose 3.9% year over year in May, meaning that, on average, prices rose faster than wages in the previous 12 months. However, understanding the dynamics of wage changes—and their relationship to rising consumer prices—requires a range of indicators above and beyond average hourly wages.
Prices for groceries remain elevated
Grocery prices remained elevated in May as prices for food purchased from stores rose 9.7%, matching the gain in April. With price increases across nearly all food products, Canadians reported food as the area in which they were most affected by rising prices. Supply chain disruptions, as well as higher transportation and input costs, continued to put upward pressure on prices.
Year over year shelter costs in May match the increase in April
In May, shelter costs rose 7.4% year over year, matching the increase in April. Year over year, homeowners’ replacement cost rose to a lesser extent in May (+11.1%) compared with April (+13.0%), as prices for new homes showed signs of cooling.
Although prices for mortgage interest cost continued to decrease on a year-over-year basis, prices fell less in May (-2.7%) compared with April (-4.4%), putting upward pressure on the headline CPI.
Prices for services rise at a faster pace year over year
Year-over-year growth in prices for services increased to 5.2% in May, following a 4.6% gain in April. As public health measures have eased, Canadians have sought out leisure activities, stayed in hotels and have eaten out more often.
Higher year-over-year prices for traveller accommodation (+40.2%), reflected increased demand for travel within Canada compared with May 2021 when some COVID-19 restrictions were still in place. Higher prices for food purchased from restaurants (+6.8%) in May also contributed to the increase in services prices.
Canadians pay more for furniture
Canadians paid more to furnish their living spaces in May, as prices for furniture rose 15.8% year over year amid higher shipping and input costs. The introduction of tariffs for imported upholstered furniture (+22.7%) from China and Vietnam, first implemented in early May 2021, have contributed to the increase in prices.
Economists expect the Bank of Canada to raise interest rates again
This new data reinforces the Bank of Canada’s motivation for slowing the economy by hiking interest rates again in July. “The continuation of sharp and broadly based price pressures makes a 0.75% hike from the Bank of Canada a near certainty, and likely means that the peak in interest rates will be higher than we previously anticipated,” wrote CIBC economist Andrew Grantham in a note.
Economists See Hotter Inflation Ahead and Higher Bank of Canada Rates
“There was no rest for those of us growing weary of escalating inflationary pressures in May.” So wrote CIBC economist Andrew Grantham after data showed that inflation was running even hotter than expected in this country.
Canada’s consumer price index surged to 7.7% in May, higher than the 6.8% reading in April and beating the consensus of 7.4%. It also beat the Bank of Canada’s spring forecast that inflation would average 5.8% this quarter.
Weary indeed — it’s a view no doubt shared by many anxiously waiting for inflation to peak, including the Bank of Canada. But that peak is proving elusive.
“The big picture remains that underlying inflationary pressures were far stronger than most anticipated,” said Capital Economics Stephen Brown.
A further 6% rise in gas prices in May compared to April suggests that inflation will run even hotter in June to about 8.3%, said Brown. Though he expects the pace of price growth to slow in July if oil declines stick, he still sees inflation remaining above 7% for the rest of this year.
BofA Global Research strategist Carlos Capistran also hiked his inflation forecast. He now predicts the rate at 7.2% at the end of 2022, up from 5.6%. “We continue to see upside risks to core inflation as the economy keeps growing above its potential, and the labour market remains tight,” said Capistran, who expects the Canadian economy to grow 3.8% this year.
With the expectations of hotter inflation, come predictions of higher rates from the Bank of Canada.
Statistics Canada’s numbers from June 22 make a 75-basis-point hike from the Bank of Canada in July a “near certainty,” said CIBC’s Grantham, a view shared by most on the Street. But they also suggest that the peak in interest rates could be “higher than the 2.75% we had previously predicted.”
BofA expects the Bank will go even higher with the three-quarter point hike in July to be followed by a 50 bp hike in September. Their strategists now see the overnight rate ending 2022 at 3.5%, and reaching 4% by the end of 2023.
JPMorgan went so far as to say the possibility of a full-percentage point rate hike is now on the table, reports BNN Bloomberg. “The pace of inflation is clearly not letting up, and the [Bank of Canada] must demonstrate its resolve and move more aggressively, in our view, to tame inflationary pressures,” the strategists said in their report “Canada CPI: Get out the oven mitts. We now see material risk that the bank will announce a 100 [basis point] increase in July.”
BMO chief economist Douglas Porter said the key takeaway from the new data is that “the Bank of Canada still has lots of work to do.” BMO expects a 75 bp hike in July, perhaps followed by another 100 bps by the end of the year. “Just like the consensus on inflation, the risks to that view seem tilted to the high side,” he wrote.
Source: Financial Post