Economists are forecasting even higher inflation in June as energy and food prices have risen and the economy has continued to strengthen.
The consumer price index in Canada reached 7.7 percent in May, a nearly 40-year high. Now economists are forecasting that figure has hit at least eight percent in the last month.
Statistics Canada is to release inflation data for June on Wednesday, a week after the Bank of Canada hiked interest rates by a full percentage point.
Prices of everything from groceries to furniture to petrol have skyrocketed around the world as pandemic restrictions eased. Energy prices shot up 35 percent year-on-year, while food prices rose about 10 percent.
And more hikes are on the horizon, with several food suppliers warning food retailers of more price hikes.
Derek Holt, head of capital markets economics at Scotiabank, forecasts inflation hit 8.9 percent in June on a “reopening effect”.
“The restrictions caused by the pandemic continued into June and that triggered a whole wave of activity — more people eating, more people flying, more people getting on boats,” Holt said.
An RBC report published on Friday said June’s price acceleration is likely to be the result of even higher food and energy prices.
“Oil prices have risen another 4.8 percent since May, and consumer food prices have skyrocketed in part due to higher commodity prices and acute supply chain disruptions,” the report said.
Canadians, whose wages continue to lag inflation, are left financially worse off by rising prices.
In June, average hourly wages were 5.2 percent higher than a year ago.
The Bank of Canada said global pressures were largely responsible for rising inflation, with the Russian invasion of Ukraine and supply chain problems putting pressure on energy and food prices.
In the US, inflation climbed to another decade-high in June, reaching 9.1 percent.
Domestically, the central bank said the economy was “overheating” as companies struggle to find workers and demand for their products remains strong. The unemployment rate hit a record low of 4.9 percent in June.
Another factor threatening to keep inflation high is rising inflation expectations among consumers and businesses, according to Bank of Canada surveys.
With the interest rate its only anti-inflation tool, the central bank hopes it can curb domestic demand and manage inflation expectations with its outsize rate hike.
In its latest monetary policy report, the Bank of Canada made this point clear.
“The bank protects itself against the risk of high inflation becoming entrenched because if that is the case, restoring price stability will require even higher interest rates, resulting in a weaker economy.”
“Restoring price stability – low, stable and predictable inflation – is of paramount importance,” Bank Governor Tiff Macklem said in a news conference after the interest rate announcement.
However, Holt said the impact of the Bank of Canada’s recent rate hike will take time to manifest.
“This is an experiment that will take more than six months to unfold,” he said.
The Bank of Canada forecasts inflation of 8 percent for the next few months before slowing to 4.6 percent next year.
Karyne Charbonneau, senior economist at CIBC, said the Bank of Canada’s forecast for inflation falling next year depends largely on global factors beyond the central bank’s control.
“These are the same factors that explain the majority of the bank’s inflation forecast errors over the past year, suggesting they are also the most difficult to predict,” Charbonneau wrote in a note.
And while there are some signs of a slowdown in Canada’s housing market, which would lower headline inflation, housing costs account for a relatively small part of the projected fall in inflation next year.
In June, average national home prices fell 1.8 percent year-on-year.
Without easing global pressures, Charbonneau said more aggressive action by the Bank of Canada would be required.
“Unless we get a little help from our friends abroad and a healthy dose of luck, we need a recession to bring inflation down.”
Nojoud Al Mallees, The Canadian Press
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