Experts surprised inflation expanded to swiftest pace in decade at 3.7%
Gasoline and home costs drive up prices well outside central bank's comfort zone
Inflation accelerated to its fastest pace in a decade last month, continuing a hot streak that could complicate the Bank of Canada's efforts to steer an economic recovery that its leaders say remain incomplete.
Statistics Canada on Wednesday reported that the consumer price index (CPI) surged 3.7 per cent from July 2020, compared with a year-over-year increase of 3.1 per cent the previous month. The July gain matched a similar burst of inflation in May 2011 and was well outside the central bank's comfort zone of one per cent to three per cent.
Gasoline and costs associated with home ownership were the main drivers of upward price growth. The headline number surprised Bay Street analysts, who were expecting a more moderate reading of around 3.4 per cent, according to a Bloomberg survey of private-sector economists.
“The staying power of inflation will ultimately depend on expectations and the response of monetary policy,” James Marple, an economist at Toronto-dominion Bank, said in a note to clients. “The Bank of Canada may be willing to tolerate higher inflation while the economy is still reopening and recovering from the health shock, but it will respond to more lasting price pressures by reducing monetary accommodation.”
During the pandemic, economists and observers have kept a close eye on inflation, which is usually a non-story since price increases tend to stick close to the Bank of Canada's target of two per cent. The pandemic has changed that. The recovery from the COVID-19 recession has been faster than many executives anticipated, causing a mismatch in supply and demand for goods and services.
Soaring inflation comes as a “double-edged sword” for Brett Chell, who heads Calgary-based Cold Bore Technology Inc., a software-as-a-service company that helps fracking companies make their operations more efficient.
Higher oil prices are good for Cold Bore, because its clients have more money to spend. However, Chell said the current situation is putting upward pressure on wages, including at his company.
“We have to keep up with the industry and everyone's getting raises, which is good, but we're paying more for everything else, so we're managing,” Chell said.
Gasoline prices and the costs of housing ownership have been a major focus over the past few months. In July, prices at the pump actually slowed down on a year-over-year basis when compared against June data. However, month-on-month gas prices rose 3.5 per cent, compared with 1.6 per cent in June. Without volatile energy prices, CPI rose 2.8 per cent from last year.
The homeowners' replacement index, which measures the costs associated with renting and owning a home, continued to trend upwards. That portion of the CPI basket rose 13.8 per cent from the same time last year, compared with a year-on-year 12.9 per cent increase in June.
“That is eye-popping,” Marple said. “(Its) contribution to inflation was huge in the year-on-year measures. It's just way off the charts.”
Marple said he expects housing inflation to ease as demand wanes and surging input costs come back to Earth.
Home transactions fell 3.5 per cent in July, the fourth month of declines, the Canadian Real Estate Association reported. As well, prices for lumber and other wood products plummeted 23 per cent in July after experiencing a more than six-per-cent drop in June, according to Statistics Canada.
Inflation has steadily risen since the start of the year, breaching the top end of the Bank of Canada's target range in April. It could be a sticky point for political party leaders who stepped onto the campaign trail this week after Justin Trudeau triggered an election on Sunday. A poll by Abacus data showed that the cost of living is the top issue for 62 per cent of Canadians and that it will drive their vote come Sept. 20.
As the economy recovers, temporary issues such as supply-chain disruptions and rotating demand will likely continue to spur prices. The Bank of Canada has factored these into its inflation forecasts, but expects those issues to pass. Because of this, the July data probably aren't high enough to push policy-makers to change their outlook of raising interest rates in the latter half of next year. Central bankers, in their latest forecast, expect inflation to hit 3.9 per cent in the third quarter.