Canada’s inflation rate climbs 3.6% in May, largest yearly increase since 2011 – National
Prices across the country rose at their fastest annual rate in a decade last month, with the promise of similar numbers through to the fall as the national economic reopening from pandemic measures allows consumers to spend more freely .
Statistics Canada said the 3.6-per-cent increase in the consumer price index in May was the largest yearly increase since May 2011 outpaced the 3.4 per cent reading in April, which at the time was the fastest annual rate in nearly a decade.
Part of the rise in inflation is due to comparing prices to the low levels seen last year at the start of the pandemic for such items as gasoline, furniture beef products.
However, Statistics Canada said the increase in year-over-year price growth in May wasn’t solely because of this comparison. It noted more recent price pressures are also driving inflation, with rising housing costs among the leading reasons.
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Adding to that are supply-chain issues that have made it more expensive to build new homes or cars, with costs being passed along to consumers.
The pickup in prices has come even as public health restrictions held back activity in high-contact sectors, said TD senior economist James Marple, noting the acceleration in inflation has come faster than forecasters the Bank of Canada expected.
Prices are expected to rise over the summer as provinces ease public health restrictions, businesses look to make up for lost revenues consumers have more places to spend their cash.
“Retailers have had a very tough time, bars restaurants have had a very tough time over the past year they’re going to want to make up for some of that lost ground with higher prices,” CIBC senior economist Royce Mendes said.
“They’re going to want to pass on those costs the key to remember here is that consumers can actually absorb those costs, maybe like never before because of all the savings that is built up during the pandemic.”
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The Bank of Canada expects inflation to hover around three per cent over the summer before easing later this year, then returning toward the bank’s two per cent target, once prices stop being compared with the lows seen in March April of last year, as supply-chain issues work themselves out.
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Separately Wednesday, the U.S. Federal Reserve raised its forecast for inflation south of the border to 3.4 per cent by the end of this year, from 2.4 per cent in its previous projection in March. The American central bank also expected to raise its benchmark short-term rate twice by late 2023, after previously estimating no rate hike before 2024.
The longer inflation stays high, the more people will come to expect it, create a feedback loop of higher wage demands followed by offsetting price increases, said Thorsten Koeppl, an economics professor at Queen’s University in Kingston, Ont.
Inflation takes off in this scenario isn’t consistent with the central bank’s target, he said, meaning one thing: “You have to raise rates.”
“For me, monetary policy is always controlling inflation expectations at the end of the day.”
Excluding gasoline, which was up 43.4 per cent compared with the same month one year ago, the consumer price index would have been up 2.5 per cent.
Statistics Canada said the average of the three measures for core inflation, which are considered better gauges of underlying price pressures closely tracked by the Bank of Canada, was 2.3 per cent in May, up from 2.1 per cent in April. The reading in May was the highest seen since April 2009.
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BMO director of Canadian rates Benjamin Reitzes said in a note that while it’s still too early to say whether firmer inflation is here to stay, the persistent strength in the figures may make the central bank a bit less comfortable with its accommodative monetary policy.
Bank of Canada governor Tiff Macklem has said the bank intends to keep its key policy rate at 0.25 per cent until the economy has recovered inflation is sustainably back on target, which is expected to happen in the second half of 2022.
Macklem is scheduled to appear before a Senate committee on Wednesday night.
The Statistics Canada report said homeowner replacement costs, which includes prices for new housing, rose 11.3 per cent year-over-year in May, the largest increase since 1987. With the jump in May, Statistics Canada said that now makes 16 consecutive months of price increases driven by buyers looking for larger homes higher construction costs.
Durable goods like vehicles were up 4.4 per cent in May from their levels in May 2020, which the statistics agency noted came against the backdrop of low interest rates rising consumer confidence.
– With files from The Associated Press
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