Both Canada and the U.S. hit record high levels of inflation in February. Canada reports 5.7%, a thirty-year-high and the U.S. surged 7.9% reaching a forty-year-high. 

Statistics Canada reported that gasoline prices drove the increase in February as they that were up 32.3% compared with February 2021 and 6.9% from January. Grocery store prices were up 7.4% for the largest yearly increase since May 2009, pushed higher by rising fuel costs that are being passed on to consumers. Shelter costs, which includes prices for homes and rental units, rose at their fastest pace since August 1983.

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.

As for rate hikes, The Bank of Canada has already done one rate increase and is anticipating more hikes throughout 2022. “The economy is now in a place where moving to a more normal setting for interest rates is appropriate,” Macklem said in a speech on March 3, a day after he and his deputies lifted the benchmark interest rate a quarter point to 0.5%, the first increase in more than three years. Scotiabank estimates that the central bank’s key interest rate will end the year at 2.5%, which is the quickest pace of rate hikes that a major bank is projecting.

While the inflation rate still has a ways to go before hitting the double-digit increases seen in the early 1980s, some recall with a shudder the dramatic impact the hyperinflation of the time had on interest rates, with five-year fixed mortgage rates spiking above 20% in 1981. Derek Holt, vice-president and head of capital markets economics at Scotiabank, said there is a real risk that inflation could get out of control. “It’s well above the Bank of Canada’s target. Indicators show that people have little confidence that the bank will be able to bring down inflation to its two% target. We’re in it for the long haul.”

The Bank of Canada’s rate hikes can cool inflation long-term, but the impact won’t be seen in the near future, Holt said. “It’s something that can try to bring inflation back down by the end of year and into 2023,” he said. “In the meantime we’re going to see inflation numbers pushed quite a bit higher, at least from summer to fall.”

Holt said any inflation spike would likely be shorter lived than the jump that occurred in the 1970s and ’80s, when interest rates spun out of control. This time, he said, the inflation drivers are supply chain issues and gas prices: issues that won’t persist for years.

“It’s definitely very hot and too hot for comfort,” said Douglas Porter, chief economist and managing director of BMO Financial Group. “What’s a bit unnerving is just how one thing after another in the past year keeps happening.” A series of unpredictable events — the pandemic, followed by the trucker protests in Canada and then Russia’s invasion of Ukraine — have impacted the economy since the start of 2022.

And the February numbers don’t take into account what we’ve seen in the days since the war began, said Porter. “The gas price increases have been mostly in March, so that’s yet to show up. Because of that, inflation numbers will be higher in March, assuming nothing else major happens,” he said.

Meanwhile, both countries are reporting that wages have yet to catch up with inflation. Canadians are largely stuck with the same wages they had a year ago, meaning costs are going up while purchasing power is going down. In February, wage data from the Labour Force Survey found wages rose 2.7% year over year, showing that prices typically rose faster than earnings.

But that could soon change, Porter said. “I’d be shocked if we don’t see a shift in wages in the coming months. Because we’ve got the combination of both a very tight job market and one of the lowest unemployment rates we’ve seen in decades, I’d be very surprised if we don’t get a fairly significant move in wages in the coming months,” he said.

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