A man is shopping for groceries at St. Lawrence in Toronto, May 18. Fred Lum/The Globe and Mail
Inflation in Canada jumped to its highest pace in nearly four decades in June, even as there were preliminary signs that consumer price growth is close to peaking, offering relief to families.
The consumer price index (CPI) rose 8.1 per cent in June from a year earlier, up from 7.7 per cent in May, Statistics Canada said on Wednesday. That was the highest rate of inflation since January 1983. Financial analysts had expected worse, with inflation rising to 8.4 percent.
The acceleration was mainly driven by petrol, Statscan said. Consumers paid 6.2 percent more at gas stations in June compared to May and 55 percent more year-on-year.
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However, crude oil has collapsed in recent weeks, which has begun to be reflected in retail prices. The national average price for unleaded regular gas was $1.87 a liter on Tuesday, down from a peak of $2.15 in early June, according to data from Kalibrate Technologies.
Spending on shelter and groceries rose at slightly slower annual rates in June, a potential sign of progress for cash-strapped household budgets. And excluding food and energy, core inflation rose 0.4% in June, a slower pace than in recent months.
“The slightly weaker-than-expected inflation reading will come as good news for central bankers trying to control price pressures,” Royce Mendes, head of macro strategy at Desjardins Securities, said in a note to clients. “Furthermore, the more recent decline in global commodity prices is driving Canadian energy prices lower in July.”
Central bankers are raising interest rates at the fastest pace in decades in an effort to curb inflation. In less than five months, the Bank of Canada raised its key interest rate to 2.5 percent from 0.25 percent. More promotions are coming, bank officials said.
Consumer prices are rising for many reasons, including supply chain disruptions that have led to product shortages; much higher commodity prices, due in part to Russia’s invasion of Ukraine; and cheap interest rates on loans that fueled a home buying boom.
The Bank of Canada, along with other central banks, has consistently underestimated the path of inflation for more than a year. For example, in April 2021 the bank forecast CPI growth of just 1.9 percent in 2022. As inflation rose last year, central bankers in Canada and elsewhere said the situation would prove “transitional.” or short-lived.
Instead, consumer prices continued to escalate, and those increases spread to more products and services. The Bank of Canada expects inflation of 7.2% this year and 4.6% in 2023, revising its CPI forecast several times.
Inflation forecasting errors are problematic. Because it takes some time for changes in interest rates to ripple through the economy, it is important that central bankers have a somewhat accurate idea of future inflation when setting their monetary policy.
Now central bankers are playing catch-up and raising rates aggressively to tame inflation, which has been significantly worse than expected. The Bank of Canada raised its key interest rate by a full percentage point last week – its biggest increase since 1998.
The bank attributed much of its forecast error to high commodity prices, such as crude oil, that it did not foresee. He also underestimated supply chain disruptions and the extent to which consumers will buy goods with many services shut down by the pandemic.
While some prices are beginning to ease, many financial analysts say it is too early to call a turning point for inflation. On the one hand, high inflation expands more products and services.
In addition, inflation is accelerating in some areas. The price of passenger vehicles rose 8.2% in June from a year earlier, up from 6.8% in May. Hotel prices rose 50 percent as the tourism industry rebounded after the pandemic halted.
Another area of concern is that inflation expectations – a key factor in determining prices and wages – continue to rise among businesses and consumers. And even if inflation eases, it could still be a long journey to the desired levels.
In its latest monetary policy report released last week, Canada’s central bank said annual CPI growth would not return to its 2 percent target until late 2024.
Interest rates and inflation are closely linked, which is why Canada’s central bank is raising its key interest rate to try to keep inflation to its 2% target. But it’s a careful balance between controlling inflation and not tipping the economy into recession. Note – since this video was posted in June, inflation has risen to 8.1% in July.
The Globe and Mail
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