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Inflation is highest since January 1991
Publication date:
May 18, 2022 • 1 hour ago • 4 minutes of reading • 136 comments Canada’s annual inflation rate picked up again in April, outpacing analysts’ expectations, largely driven by rising food and shelter prices. Photo by James Park / Postmedia
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Canada’s main inflation gauge rose 6.8 percent in April from a year earlier, one of the fastest since the early 1980s. Here’s what you need to know.
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how bad is it
Not as bad as the United Kingdom, where inflation rose to nine percent in April, according to data released before new data for Canada.
But core inflation of 6.8 percent is still pretty bad. On an annual basis, the growth of the consumer price index reached 6.9% in January 1991 and was around 6% for most of this year. Otherwise, inflation has not been so hot since the early 1980s.
There is some evidence that the rate of increase is slowing. The title was 6.7% in March, a staggering increase of 5.7% in February and 5.1% in January. But math can start to make inflation in the title look better. This is because inflation is usually discussed as annual changes in the consumer price index, which collects hundreds of prices of goods and services each month. For most of the past year, these calculations have been made against an unusually low base, as the index fell during the recession. These “basic effects” are no longer in play.
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However, some economists noted that gasoline prices, which always have a huge impact on the title number, jumped in May. And because transportation costs affect the price of almost everything, there is a risk that inflation will “fix” in the economy, said Douglas Porter, chief economist at the Bank of Montreal, in a note to customers. “Except for the deep drop in oil prices in the coming weeks and months, we expect the worst to come in the headlines and that inflation north of 6 percent will still be with us until the end of this year,” he said. .
What causes it?
The same things that brought inflation out of the top of the Bank of Canada’s comfort zone by one to three percent in April 2021: commodity prices and housing costs.
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Gasoline prices were 36% higher than in April 2021, according to Canadian statistics. The agency’s measurement of how much it would cost homeowners to replace their existing homes if they buy at current prices increased by about 17 percent, and total housing costs increased by 13 percent. Car prices and the price of food, including food in the restaurant, are the other big drivers.
Shop-bought food rose 9.1%, the biggest increase since 1981, the latest example of how the war in Ukraine, combined with already reduced supplies of basic goods after a series of bad harvests around the world, poses a serious threat. for food security. Canada as a whole is rich enough to absorb the shock. Poorer countries are not.
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These are just the most noticeable increases, but the price pressure is wide. More than 70 percent of the goods and services tracked by Statistics Canada have increased by more than two percent since April 2021, according to Claire Fenn, an economist at the Royal Bank of Canada. With the exception of petrol, the index rose 5.8% from a year earlier, the most since Statistics Canada created the sub-index in 1999.
There is no doubt that the initial problem is delivery. Blockades and pandemic absences are crippling production in Asia, disrupting supply chains. Sushi and other extreme weather conditions have affected the harvest, reducing stocks of basic products. At the same time, demand is holding back despite the epic recession, as governments and central banks have responded to the pandemic with unprecedented levels of stimulus and much of the working population has been able to work from home. Central bankers in Canada, the United States and elsewhere are now acknowledging that they may have kept interest rates too low for too long because the unemployed are extremely low and demand has outpaced supply.
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Is everything more expensive?
Not all. Mortgage fees and telephone services are lower, and the price of tours fell by 18.6% compared to April 2021.
It is worth stopping for mortgages. The cost of borrowing money to buy a home is 4.4% lower than a year earlier. This is important because it implies that homeowners who have borrowed at lower interest rates will not face a terrible shock when / if interest rates on their mortgages reset in the coming months.
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Does the Bank of Canada have an answer?
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Yes: Higher interest rates.
The Bank of Canada has admitted that it misjudged the price pressures. The last quarterly economic outlook of the central bank shows an increase in the consumer price index on an annual basis by an average of 5.6% in the first quarter, and instead it averaged 5.8%, the current forecast of the institution for the second quarter. Inflation is hotter than politicians expect, which means they have no choice but to take a steeper return to higher interest rates. Their main mission is to maintain the growth of the consumer price index at an annual rate of about two percent. They have a job.
Bank of Canada Governor Typh McLem said he would raise the base rate by half a point as politicians follow a June 1 policy adjustment. This will bring the interest rates used by creditors as a benchmark for interest rates on mortgages and other loans to 1.5 percent, compared to 0.25 percent at the beginning of the year.
Central bank executives have said they will not stop until they set a target interest rate to a “neutral” setting, which they define as between two percent and three percent. Macklem also said he may need to raise the reference interest rate above three percent to bring inflation back to target.
• Email: kcarmichael@postmedia.com | Twitter: carmichaelkevin
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