Canadian inflation jumped to its highest rate in nearly four decades in June, although there are signs that rising consumer prices are about to catch up, 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. It was the highest rate of inflation since January 1983. Economists had expected worse, with inflation climbing to 8.4%. The acceleration was mainly due to petrol, Statscan said. Consumers paid 6.2 percent more at the pump in June than in May and 55 percent more year-over-year. Blame America: Why Canada’s Skyrocketing Inflation Isn’t All Our Fault However, crude oil has fallen in recent weeks, which has begun to be reflected in retail prices. The national average price of regular unleaded gas was $1.87 a liter on Tuesday, down from a peak of $2.15 in early June, according to data from Kalibrate Technologies. Housing and grocery costs rose at slightly slower annual rates in June, a possible 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. “Slightly weaker than expected inflation readings will be good news for central bankers trying to control price pressures,” Royce Mendes, chief macro strategist at Desjardins Securities, said in a note to clients. “Furthermore, the latest 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 reduce inflation. In less than five months, the Bank of Canada raised its policy rate to 2.5 per cent from 0.25 per cent. More hikes 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 lending rates that fueled a boom in housing markets. 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 “transitory,” or short-lived. Instead, consumer prices have continued to rise, and these increases have spread to more goods and services. The Bank of Canada expects inflation of 7.2% this year and 4.6% in 2023, having revised its CPI forecast higher several times. Errors in forecasting inflation are problematic. Because it takes some time for changes in interest rates to trickle down to the economy, it is important that central bankers have a somewhat accurate view of future inflation when setting their monetary policy. Now, central bank officials are playing hardball and raising interest rates aggressively to tame inflation that is significantly worse than expected. The Bank of Canada raised its key interest rate by a full percentage point last week – the biggest increase since 1998. The bank attributes much of its forecast error to high commodity prices, such as crude oil, that it did not expect. He also underestimated supply chain disruptions and the extent to which consumers would buy goods with many services shut down by the pandemic. While some prices are beginning to decline, many economic analysts say it is too early to call a turning point for inflation. First, high inflation expands more goods and services. In addition, inflation is accelerating in some areas. Passenger vehicle costs rose 8.2 percent in June from a year earlier, up from 6.8 percent in May. Hotel prices rose 50% as the travel industry recovered from the pandemic. Another area of concern is that inflation expectations – a key determinant of prices and wages – continue to rise among businesses and consumers. And even if inflation eases, it could be a long journey back to desired levels. In its latest Monetary Policy Report, published last week, the Bank of Canada said annual CPI growth would not return to its 2 percent target until the end of 2024. Interest rates and inflation are closely linked, which is why the Bank of Canada is pushing its key interest rate to try to keep inflation at 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 rose to 8.1% in July. The Globe and Mail Your time is valuable. Deliver the Top Business Headlines newsletter to your inbox morning or night. Sign up today.
