Canada’s Inflation Rate Hits 8.1% but Early Signs Suggest Peak Near

Canadian inflation jumped to the highest rate in nearly four decades in June, although there were tentative signs that consumer price growth is close to topping out. The consumer price index (CPI) rose 8.1% in June from June 2021, and up from 7.7% in May, Statistics Canada said. It was the highest inflation rate since January, 1983. Financial analysts were expecting a loftier reading of 8.4%.

The acceleration was mainly because of gasoline, Statscan said. Consumers paid 6.2% more at the pump in June than May, and 55% more on an annual basis. However, crude oil has tumbled in recent weeks, which has started to be reflected in retail pricing.

Excluding food and energy, inflation rose 0.4% in June from May, a slower pace than in recent months. And in a separate report Statscan said that prices for industrial products fell 1.1% in June, the first monthly decline since last summer. Softwood lumber fell 28% in a single month, partly because of slowing U.S. construction.

“We may be at or very close to a peak. It’s too early to say,” Derek Burleton, deputy chief economist at Toronto-Dominion Bank, said in an interview. “This will bring some relief to the Bank of Canada, but they’re still looking at inflation that’s far too high.”

Central bankers are raising interest rates at the quickest pace in decades in their attempt to tame inflation. In less than five months, the Bank of Canada raised its policy rate to 2.5% from 0.25%. More hikes are coming, bank officials have indicated.

Despite signs of progress in the inflation fight, other aspects of the report were less encouraging. The average of the Bank of Canada’s core measures of inflation – which remove outlier changes in the CPI, such as gasoline – rose to 5% from 4.9%.

The cost of passenger vehicles rose 8.2% in June from June 2021, up from 6.8% in May. Statscan said demand for automobiles is still outpacing supply as car producers struggle to procure semiconductors, putting upward pressure on prices.

The summer travel boom is leading to an explosion in prices. Accommodation rates were up 50% on an annual basis. Airfares jumped 6.4% in June alone.

Mr. Burleton warned that services are the “stickiest aspect” of CPI. He pointed to rising rents in a “drum tight” housing market, along with higher debt-servicing costs. Mortgage interest payments jumped 1.4% in June, the largest monthly increase since 1982.

On the other hand, food is potentially close to a turning point. Grocery prices rose 9.4% in June from a June 2021, slowing from 9.7% in May. Sylvain Charlebois, director of the Agri-Food Analytics Lab at Dalhousie University, said that food inflation may have peaked. “If nature continues to co-operate, Canada’s agricultural sector should see a strong harvest this year, helping to keep commodity prices lower and costs down,” he wrote in a memo. 

In an interview with CTV News, Bank of Canada Governor Tiff Macklem said the July inflation rate “probably will come down a bit” because of lower gas prices. Unfortunately, inflation is probably going to start with a 7 for the rest of the year. It is going to be painfully high.”

Forecasting inflation has proved quite difficult for policy makers. The Bank of Canada now expects inflation of 7.2% this year and 4.6% in 2023, having revised its CPI forecast higher several times.

In its latest Monetary Policy Report, the Bank of Canada attributed a large portion of its previous forecasting error to high commodity prices, such as crude oil, that it didn’t anticipate. It also underestimated supply-chain disruptions and the extent to which consumers would buy goods with many services shuttered by the pandemic.

Errors in forecasting are problematic. Because it takes a while for changes in interest rates to trickle through the economy, central bankers need a somewhat accurate view of inflation when setting policy.

Now, central-bank officials are playing catch-up and raising rates aggressively to curb inflation that is significantly worse than expected. Mr. Macklem said the path to a “soft landing” – in which inflation is brought under control without causing a recession – is narrowing.

“It’s really hard to not see a moderate contraction in the economy,” said Claire Fan, an economist at Royal Bank of Canada. RBC is the sole major bank in Canada to project a recession by 2023, though not a severe one by historical standards.

If consumer price growth starts to ease, it could still be a lengthy journey back to desired levels: the Bank of Canada doesn’t expect inflation to return to its 2% target until the end of 2024. “Most of the heavy lifting on lower inflation is going to be a 2023 story,” Mr. Burleton said.

Source: Globe and Mail
Source: Financial Post

U.S. Inflation Hits New 40-Year High in June as Gas, Food Prices Surge

Surging prices for gas, food and rent catapulted U.S. inflation to a new four-decade peak in June, further pressuring households and likely sealing the case for another large interest rate hike by the Federal Reserve, with higher borrowing costs to follow.

Consumer prices soared 9.1% compared with June 2021, the government said, the biggest 12-month increase since 1981, and up from an 8.6% jump in May. On a monthly basis, prices rose 1.3% from May to June, another substantial increase, after prices had jumped 1% from April to May.

The ongoing price increases underscore the brutal impact that inflation has inflicted on many families, with the costs of necessities, in particular, rising much faster than average incomes. Lower-income and Black and Hispanic Americans have been hit especially hard, because a disproportionate share of their income goes toward such essentials as housing, transportation and food.

Some economists have held out hope that inflation might be reaching or nearing a short-term peak. Gas prices, for example, have fallen but are still far higher than in 2021.

In addition, shipping costs and commodity prices have begun to fall. Pay increases have slowed. And surveys show that Americans’ expectations for inflation over the long run have eased — a trend that often points to more moderate price increases over time.

Yet for now, the relentless spike in inflation has caused a steep drop in consumers’ confidence in the economy. In the immediate aftermath of the 2020 pandemic recession, as Americans focused their spending on items for the home, like furniture, appliances and exercise equipment, supply chains became overwhelmed and prices for physical goods soared. But as consumer spending has gradually shifted away from goods and toward services like vacation travel, restaurants meals, movies, concerts and sporting events, some of the highest price increases have occurred in services.

Housing, in particular, has been seized by some of the highest inflation rates in the economy, causing hardships for many. A shortage of houses for sale has sent home prices skyrocketing just as mortgage rates have also soared.

With many people priced out of the market for houses and looking instead to rent, demand for apartments has sent rental rates beyond affordable levels. The national median home price jumped 14.8% in May from a year earlier to $407,600. That’s an all-time high according to data to 1999, according to the National Association of Realtors.

The persistence of high inflation has unnerved Chair Jerome Powell and other Fed officials, who are engaged in the fastest series of rate hikes since the late 1980s to try to slow the price spikes. The central bank is expected to raise its key short-term rate later in July, with potentially more large rate hikes to follow.

Many economists worry that the Fed’s drive to quell inflation will cause it to tighten credit too aggressively even while the economy, by some measures, is slowing. Much higher borrowing costs could trigger a recession, potentially by next year.

Consumers have started to pull back on spending, home sales are falling as mortgage rates rise and factory output slipped in May. Yet steadily robust job growth points to an economy that is still expanding, with little sign of an imminent recession.

Though inflation is likely to slow later in 2022, it’s not clear by how much. Despite, decreases in commodity prices and freight costs, plenty of items are still rising in price, notably apartment rents. The average cost of new leases has jumped 14% in the past year, according to real estate brokerage Redfin, to an average of $2,016 a month.

Rents as measured by the government’s inflation index have risen more slowly because they include all rents, including existing leases. But economists expect the rising expense of new leases to send the government’s inflation measure higher in coming months.

Source: Globe and Mail
Source: The Star