Inflation holds at 18-year high in Canada as pressure mounts to raise rates – Financial Post

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The Consumer Price Index (CPI) increased 4.7 per cent in November from a year earlier, matching October’s surge, as gasoline and shelter costs continued to stoke the most serious bout of inflation in three decades.

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At least the CPI, which the Bank of Canada uses to guide its interest-rate policy, stopped rising. Year-over-year increases exceeded the top end of the central bank’s comfort zone of one per cent to three per cent in April, and accelerated monthly until November. Inflation touched 4.7 per cent in February 2003, but otherwise upward price pressures haven’t been this strong since 1991.

The persistence of inflation has surprised Bank of Canada governor Tiff Macklem, who began the year determined to push the jobless rate back to pre-pandemic levels of around 5.5 per cent. That target now appears out of reach, as pressure is mounting to raise interest rates before cost pressures emanating from supply disruptions turn into an inflationary spiral.

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“While Canada’s economic recovery is still incomplete and uneven, it’s sufficiently entrenched that the bank should start to remove some of its emergency support in the first quarter of 2022,” Stephen Tapp, chief economist at the Canadian Chamber of Commerce and a former staffer at the central bank, said in an email. “In the near term, profitability will be squeezed, and if businesses pass cost increases onto their consumers, it’ll prolong pressures on (expected) inflation and wages.”

While this release alone may not advance the case for rate hikes, the bigger picture continues to do so — loudly

Douglas Porter, chief economist at Bank of Montreal

Gasoline prices were about 44 per cent higher than in November 2020, reflecting the volatility of energy markets over the past year. If energy is subtracted from Statistics Canada’s basket of widely purchased goods and services, the CPI rose 3.3 per cent, a less alarming rate of change, but still outside the central bank’s comfort zone.

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Shelter costs increased 4.8 per cent and food rose 4.4 per cent from a year earlier. The strain on day-to-day costs was somewhat offset by an 18 per cent drop in the cost of mobile plans. Statistics Canada said telecommunications offered a range of promotions last month, creating a gap with prevailing costs in November 2020. Providers also started offering more data for the same price, which statisticians consider a disinflationary force, since consumers are getting more without having to pay extra.

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The latest CPI reading is in line with the Bank of Canada’s outlook . The central bank in October said the index would average year-over-year increases of 4.8 per cent over the fourth quarter. Macklem and his deputies continue to see the current inflation as a global phenomenon caused by an acute mismatch between demand and supply. As executives and logistics experts restore balance, policy-makers assume price pressures will recede, although they admit their confidence in that outlook has become wobbly in recent weeks.

“While we expect inflation to ease in the second half of 2022, we are closely watching inflation expectations and wage costs,” Macklem said in a speech on Dec. 15. “We will ensure that the forces pushing up prices do not become embedded in ongoing inflation.”

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It’s unclear what impact higher interest rates would have on the recent bout of inflation. There’s nothing the Bank of Canada can do to influence the oil market, and food prices are rising because of an uncommon number of adverse weather events in key agricultural regions around the world. Higher interest rates will do little to speed the production of computer chips, the shortage of which is slowing the production of automobiles, or speed the unloading of containers piling up at congested ports.

Still, the Bank of Canada probably does influence expectations, which central bankers believe are an important driver of inflation. If workers think their cost of living is rising at the rate of five per cent, they will begin asking for pay increases of at least as much, and employers will raise their prices to cover their higher labour bills. An interest-rate increase could short circuit that cycle and stop inflation from becoming a self-fulfilling prophecy.

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“Even with the steady read, the reality is that CPI is running far above target,” Douglas Porter, chief economist at Bank of Montreal, said. “While this release alone may not advance the case for rate hikes, the bigger picture continues to do so — loudly.”

• Email: kcarmichael@postmedia.com | Twitter: carmichaelkevin

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