Canadian inflation accelerated to the highest rate in nearly four decades in May as calls broaden for policy makers to find new ways of curbing runaway price growth.
The consumer price index (CPI) rose 7.7 per cent in May from a year earlier, up from 6.8 per cent in April, Statistics Canada said on Wednesday. It was the highest inflation rate since 1983, and part of a global surge in prices.
“We know inflation is keeping Canadians up at night; it’s keeping us up at night, ”Carolyn Rogers, senior deputy governor at the Bank of Canada, said on Wednesday at a Globe and Mail event. “And we will not rest easy until we get it back down to target,” which is 2 per cent.
The recent jump in energy costs, stoked by the Russia-Ukraine war, is having a tangible effect on the numbers. Gasoline prices rose 12 per cent in May alone and were up 48 per cent from a year earlier; the national average price for regular unleaded gas remains north of $ 2 a liter.
Still, consumers are feeling the pressure on several fronts – from increased costs in the grocery aisle and at furniture stores to pricey hotel rates and escalating rents. At the same time, average wages aren’t keeping pace with inflation, which erodes purchasing power.
It’s unlikely to be the peak for inflation, either. Canadians are paying more for gasoline in June, putting further upward pressure on growth in consumer prices. Several financial analysts said on Wednesday that the inflation rate could hit – or even exceed – 8 per cent in the near future.
Central bankers have embarked on their quickest pace of interest rate hikes in decades to tame inflation. The Bank of Canada has raised its benchmark interest rate three times this year, taking it to 1.5 per cent from a pandemic low of 0.25 per cent. The US Federal Reserve hiked its key rate by three-quarters of a percentage point last week, to a range of 1.5 per cent to 1.75 per cent.
The Bank of Canada will make its next rate decision on July 13. Most analysts on Bay Street expect the central bank to match the Fed with its own hike of 75 basis points.
Super savers are fighting rising grocery costs – and inflation – one deal at a time
Explainer: What does inflation mean for the cost of living in Canada? Here’s what you need to know
“The Bank of Canada needs to get a handle on prices soon,” Royce Mendes, macro strategist at Desjardins Securities, wrote in a note to clients. “The acceleration in inflation will likely force the Bank of Canada to raise rates a further 75 [basis points]a jumbo-sized move central bankers should have made earlier this month. ”
When asked whether the bank would move by 75 basis points at its next decision, Ms. Rogers did not rule it out. “We’ll take the July decision when we get to July. We do not have too much longer to wait, ”she said.
Consumer prices have been rising rapidly for a variety of reasons, including supply chain disruptions that have led to product shortages and steep shipping costs; the Russia-Ukraine war, which is driving up prices for commodities such as crude oil and wheat; and excess demand for many goods and services. Wednesday’s inflation report showed that price hikes are widespread and include many everyday purchases for households.
Grocery prices rose 9.7 per cent in May on an annual basis, matching the gain in April. Housing costs rose 7.4 per cent, also the same as April. Mortgage interest payments are rising as Canadians start to cope with higher interest rates, pushing up inflation.
The reopening of the economy was also a contributor. Costs increased 40 per cent for traveler accommodation over the past year, and 6.8 per cent for restaurant food.
May’s report also included used-car prices for the first time in the CPI. Previously, Statscan used changes in new car prices as a proxy for the used-car market. The agency noted that prices for used passenger vehicles rose 2.2 per cent in May from April.
Prices on global stock markets have plunged recently as investors sour on the state of the economy. Central bankers are trying to quell inflation through higher interest rates, but without sending the economy into a recession – a “soft landing” that investors view as increasingly unlikely.
Of late, calls have grown for governments to play a larger role in fighting inflation. On Sunday, Bank of Nova Scotia published a report that urged the federal Liberals to do their part in reducing demand in the economy by curbing government spending, particularly through its operational expenses.
“If you manage to scale back government spending – this is not program spending, this is the operation of government – you would probably have an easier time getting inflation under control, and at less cost to households,” said Jean-François Perrault, chief economist at Scotiabank.
Deputy Prime Minister Chrystia Freeland told a Bay Street audience last week that $ 8.9-billion in previously announced measures will help various Canadians with their living expenses, including a 10-per-cent increase in Old Age Security for seniors over 75 and increased funding for child care. Ms. Freeland did not announce any new measures that day.
“I wouldn’t characterize that as an inflation-fighting speech,” Mr. Perrault said. “They didn’t go the step beyond and say, ‘Listen, we’re rethinking our spending profile for the next year or two in light of inflation worries.'”
On Wednesday, US President Joe Biden called on Congress to suspend the federal gas tax for three months. Ms. Freeland said this week it would not rule out any policy options to tackle inflation, but noted a reduction in gas taxes would hamper efforts to shrink the deficit, and she pointed to carbon tax rebates that households already receive.
The Bank of Canada’s rate hikes have been quick to reverberate in the housing market, which has posted lower sales volumes and falling prices this spring, especially in parts of BC and Ontario.
Ms. Rogers said the central bank watches the housing sector “really, really closely.” However, she noted that 35 per cent of people have active mortgages – the rest are renters or have paid for their homes – while everyone buys groceries.
“Most people fill up their car. Inflation is hurting everyone. So our number one goal is getting inflation down. ”
Your time is valuable. Have the Top Business Headlines newsletter conveniently delivered to your inbox in the morning or evening. Sign up today.