Wednesday, December 8

Canada’s inflation rate soars to almost 20-year high, raising odds of earlier rate hike


Kevin Carmichael: Bank of Canada’s big worry is stopping rising prices from becoming a self-fulfilling prophecy

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Inflation is nearing its fastest pace since the Bank of Canada began using the consumer price index to set interest rates in the early 1990s, increasing the odds that central bank will raise borrowing costs early in the new year.

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The CPI surged 4.7 per cent in October from a year earlier, compared with a year-over-year gain of 4.4 per cent in September, Statistics Canada reported on Nov. 17. The latest reading matched a similar increase in February 2003, which had stood alone as the biggest increase since a 5.5-per-cent gain in October 1991, a moment when the Bank of Canada was nearing the end of a successful fight against a wave of price increases that peaked around seven per cent earlier that year.

Inflation remains a dilemma for Bank of Canada Governor Tiff Macklem despite the alarming jump in the CPI because various labour-market indicators suggest the economy remains weak, justifying the benchmark interest rate’s current setting of 0.25 per cent. The biggest driver behind the latest surge in the CPI was a 42-per-cent increase in gasoline prices, which are being stoked by a severe mismatch between supply and demand in global energy markets. There’s nothing the Bank of Canada can do about that.

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With energy subtracted from the CPI basket of goods and services, the increase from October 2020 was 3.3 per cent, the same year-over-year gain that was posted in September, Statistics Canada said. That’s still hotter than the Bank of Canada would like , but suggests that underlying price pressures probably aren’t as severe as the headline number makes them out to be. The average of three measures of “core” inflation that the Bank of Canada follows to assess price trends was 2.7 per cent, a reading that falls within the central bank’s comfort zone for inflation of one per cent to three per cent.

“Changes in domestic monetary policy — although arguably important for signalling reasons — won’t alleviate inflation pressures that are global in nature,” Karl Schamotta, chief market strategist at Cambridge Global Payments, said in a email to clients. “Ebbing supply chain issues , falling commodity prices, and lower levels of fiscal support are likely to prove more important over the year ahead.”

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Macklem would look through the recent burst inflation if not for concern about what the outsized readings will do to expectations of where prices are headed. He and his deputies opted last month to end their bond-buying program and advance by three months their timeline for their first post-pandemic interest-rate increase. The main reason for those moves was to keep inflation from becoming a self-fulfilling prophecy, whereby workers start demanding higher wages and suppliers begin raising prices in anticipation of permanently higher costs.

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That’s a legitimate concern. All of the major components of the Statistics Canada’s CPI basket increased in October, led by a 10-per-cent jump in transportation costs, which capture energy prices. Shelter costs increased 4.8 per cent and food costs rose 3.8 per cent from October 2020. Both those gains were roughly the same as the previous month.

“The recovering economy and hot inflation will likely prompt the Bank of Canada to react and raise interest rates sooner rather than later,” said Ksenia Bushmeneva, an economist at Toronto-Dominion Bank. “We expect the Bank of Canada to start raising its key interest rate in April of 2022, but cannot rule out the possibility the central bank will act earlier if the job market remains resilient and inflation keeps surprising to the upside.”

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