Inflation rate shatters expectations, hits 31-year high

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Canada’s inflation rate hit a new three-decade high in March and blew past expectations on Bay Street, an unwelcome development for central bankers trying to slow the acceleration.

The Consumer Price Index rose 6.7 per cent in March from a year earlier, a percentage point higher than February’s rate, 5.7 per cent, Statistics Canada said on Wednesday. Financial analysts were expecting an inflation rate of 6.1 per cent. It was the highest rate since January, 1991, when the federal goods and services tax took effect.

Steeper inflation is getting tougher for Canadians to avoid. Around two-thirds of CPI items are experiencing annual price gains of more than 3 per cent, such as gasoline (39.8 per cent), shelter (6.8 per cent) and household appliances (9.4 per cent).

Several factors are driving the inflation run-up, including persistent supply chain disruptions and the Russia-Ukraine war, which has pushed up commodity prices. Moreover, as public-health restrictions ease, people are unleashing their pandemic savings in service industries such as travel, and the increase in demand is contributing to the price surge.

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Inflation has now exceeded the Bank of Canada’s target range of 1 per cent to 3 per cent for a full year, and that streak should last a while longer: The central bank expects inflation to average more than 5 per cent in 2022.

The Bank of Canada has been moving aggressively to rein in runaway price growth. The bank raised its benchmark interest rate by half a percentage point last week to 1 per cent – the largest increase at a single decision since 2000. It usually raises rates by a quarter-point.

After the outsized inflation reading, several analysts said the Bank of Canada would raise rates by another half-point at its next decision on June 1.

“The longer we’re stuck in this high-inflation regime, the more people start to think that it’s here forever,” said Jimmy Jean, chief economist at Desjardins Securities. “That’s why [the Bank of Canada] needs to act as swiftly as possible to preserve their credibility.”

Gas prices had a big impact on Wednesday’s report, jumping 11.8 per cent in a single month. The cost of groceries rose 8.7 per cent, the largest annual increase since 2009. Pasta products climbed nearly 18 per cent, butter by 16 per cent and fresh milk by 7.7 per cent.

The average of the Bank of Canada’s core measures of annual inflation – which strip out volatile price swings, such as with gas – rose to 3.8 per cent from 3.5 per cent in February.

Inflation is also picking up in pandemic-hit sectors. The cost of restaurant meals rose 5.4 per cent over the past year, up from 4.7 per cent in February. Traveller accommodation prices soared 24.4 per cent on an annual basis, while air transportation jumped 8.3 per cent in March alone.

“Strong demand for domestic travel and trips to the United States during the March break contributed to higher prices this month,” Statscan said.

Several economists said on Wednesday that Canada’s annual inflation rate may have peaked in March, or will soon. For one, gas prices have eased somewhat in April thus far. And the inflation rate could benefit from base effects – that is, comparisons to the accelerating CPI of a year earlier, which could dampen the annual percentage change.

“Hitting a peak is just one milestone, but you’re looking at inflation at 6.7 per cent, and you have to bring it down to 2 per cent,” said Mr. Jean, referring to the Bank of Canada’s target. “That’s going to take a long, long time.”

Some financial analysts have said that central bankers, in Canada and elsewhere, were slow to recognize and react to the inflationary threat. During the pandemic recovery, the Bank of Canada has continually raised its inflation forecast. It recently projected that CPI growth would average 5.3 per cent this year, up from a forecast of 4.2 per cent in January and 3.4 per cent in October.

The central bank does not see inflation returning to 2 per cent until 2024.

A key concern among economists is that Canadian consumers and businesses – who negotiate wages and set prices, respectively – expect inflation to remain high for the next two years, according to Bank of Canada surveys, which could keep CPI on an elevated path for some time.

The stakes are high for the central bank, which is looking to keep inflation expectations in check and guard its reputation as steward of low and stable inflation.

“We have a full-on inflation issue, and the central banks need to play catch-up, with haste,” Bank of Montreal chief economist Doug Porter wrote to clients.

To that end, Bank of Canada Governor Tiff Macklem has said more hikes in interest rates are on the way, setting up the quickest cycle of monetary policy tightening in decades. Already, borrowing rates for mortgages and other loans are rising quickly, a source of potential stress for households carrying debt.

“By making borrowing more expensive and increasing the return on saving, a higher policy interest rate dampens spending, reducing overall demand in the economy,” Mr. Macklem said last week in prepared remarks alongside the rate decision. “And with demand starting to run ahead of the economy’s supply capacity, we need that to happen to bring the economy into balance and cool domestic inflation.”

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