Canadian Inflation Hits a New Three-Decade High With Pressure to Raise Interest Rates Intensifying

The purchasing power of Canadians waned further in January as wages were outpaced by an annual inflation rate that topped 5% for the first time in more than 30 years. The annual inflation rate rose to 5.1% in January compared with a gain for 4.8% in December, Statistics Canada reported driven higher by prices for housing, gasoline and groceries.

Here’s what happened in the provinces (previous month in brackets):

  • Newfoundland and Labrador: 4.0% (4.2)
  • Prince Edward Island: 7.1% (6.7)
  • Nova Scotia: 4.9% (4.8)
  • New Brunswick: 5.3% (5.4)
  • Quebec: 5.1% (5.1)
  • Ontario: 5.7% (5.2)
  • Manitoba: 5.5% (4.7)
  • Saskatchewan: 4.2% (3.5)
  • Alberta: 4.8% (4.8)
  • British Columbia: 4.3% (3.9)

Over the same stretch, wages rose by 2.4%, a gap in purchasing power inflamed by rising costs for essentials like food that often hit lower-income households the hardest. Tu Nguyen, an economist with accounting firm RSM Canada, said households are already looking for ways to buy more with less, either through switching to discount stores or opting for cheaper proteins instead of beef, chicken and fish that all saw faster price increases in January compared with December. “The more people have to spend on food, housing and gas, all essential items, the less they are going to have to spend on discretionary items such as entertainment as well as travel,” Nguyen said.

The strain on households is likely to get worse in the coming months as the drivers of inflation in January continue. Gasoline prices were up 31.7% in January compared with January 2021, with the backdrop of mounting concerns over global oil supplies linked to the threat of Russian military action against Ukraine.

Excluding gasoline prices, Statistics Canada said the annual rate of inflation would have been 4.3% in January, which the agency noted was the fastest pace it has on record. BMO chief economist Douglas Porter said gasoline prices are up again this month, meaning Canadians shouldn’t expect any relief when the February inflation report comes out.

Prices for groceries in January were up year-over-year by 6.5% — the largest yearly increase since May 2009 — because of higher shipping costs linked to global supply chain issues. Grocery prices are set to go higher in February because of protesters blockading key border crossings, and a big jump in dairy prices at the start of the month, CIBC senior economist Andrew Grantham said.

Shelter prices rose 6.2% year-over-year, the fastest pace since February 1990, driven by higher prices for new homes as well as rent increases. Canada’s hot housing market should cool if the central bank hikes rates, though Nguyen said hikes alone won’t solve the problem of low supply of, and high demand for housing.

The Bank of Canada is expected to raise rates at its next scheduled interest rate announcement in the beginning of March, in what’s likely the first of several hikes over the course of the year designed to cool inflation. In a speech on February 16, Bank of Canada deputy governor Timothy Lane said the central bank still expects inflation rates to come down quickly in the second half of the year, but noted inflation may, again, prove more persistent. He said the bank would use its tools forcefully, if necessary. During an ensuing question-and-answer session with the University of Calgary’s school of public policy, Lane said senior bank officials would also be assessing the potential impact of border blockades on the economy during deliberations on the path for interest rates.

The average of the three measures for core inflation, which are considered better gauges of underlying price pressures and closely tracked by the Bank of Canada, was 3.2% for January, up from the 2.93% reported in December. Statistics Canada said that was the fastest pace recorded since August 1991.

Source: Globe and Mail
Source: The Star
Source: The Star
Source: Financial Post

U.S. Inflation Surges to Highest in 40 Years

U.S. consumer prices surged in January by more than expected, sending the annual inflation rate to a fresh four-decade high and adding more urgency to the Federal Reserve’s plans to start raising interest rates. The consumer price index climbed 7.5% from January 2021 following a 7% annual gain in December, according to Labor Department data. The widely followed inflation gauge rose 0.6% in January 2022 from a December 2021, reflecting broad increases that included higher food, electricity and housing costs. Excluding the volatile food and energy components, so-called core prices increased 6% from a January 2021, also the most since 1982, and 0.6% from a December 2021.

U.S. Treasury yields surged and stock futures slumped following the report. Economists projected a 7.3% year-over-year increase in the CPI and 0.4% from December 2021, according to the Bloomberg survey medians.

The data reinforce the Fed’s intentions to begin raising rates in March to combat broad-based inflationary pressures and could lead markets to expect even more aggressive action from the central bank. The steady run-up in prices has eroded recent wage gains and diminished American families’ purchasing power, sucking much of the air out of what has been an exceptional bounceback in the U.S. economy.

Investors boosted their expectations for a more aggressive removal of monetary stimulus by the central bank. Markets are now predicting a 50/50 chance of a half-point hike in March. While most economists expect a more gradual approach to liftoff — as has been telegraphed by several Fed officials — the acceleration of inflation on the heels of rapid wage gains will keep the possibility of a half-point hike on the table.

The rapid pickup in inflation boils down in large part to the mismatch between supply and demand. With the help of massive government stimulus, a surge in household purchases strained factories and global supply chains. Capacity constraints of U.S. producers trying to ramp up production were made worse by a smaller pool of available labor.

The tight labour market, in which the unemployment rate is now 4%, has led employers to bid up wages in an attempt to fill millions of job openings and retain workers. In 2021, compensation costs surged by the most in two decades.

Even so, wages aren’t keeping up with inflation. Inflation-adjusted average hourly earnings fell 1.7% in January from a year earlier, marking the 10th straight decline, separate data showed.

Shelter costs — which are considered to be a more structural component of the CPI and make up about a third of the overall index — climbed 0.3% from December 2021. The increase reflected the biggest jump in rent of primary residence since May 2001. Owners’ equivalent rent also rose. Lodging away from home fell 3.9%, the weakest print since April 2020 and likely reflecting reduced travel amid the surge in Covid-19 infections.

Housing prices are expected to offer a tailwind to inflation in coming months. Like wage increases, shelter is often considered a “sticky” component of inflation, meaning once prices rise, they’re less likely to come back down. A sustained acceleration in structural categories like shelter, rather than surges in volatile CPI components such as energy, presents a more serious threat to the central bank’s inflation target.

Source: Financial Post