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A man shops at Iqbal Halal grocery store, in Toronto, May 7.Christopher Katsarov/The Globe and Mail
Canadian inflation hit a three-decade high in November as the economy now deals with rapidly increasing infections tied to the Omicron variant of COVID-19, threatening to exacerbate supply disruptions that have pushed up prices and become a top concern for households.
The consumer price index (CPI) rose 4.7 per cent in November from a year earlier, matching October’s rate, which was the highest in 18 years, Statistics Canada said Wednesday. However, at the second decimal place, inflation of 4.72 per cent was the highest since September, 1991.
The result met expectations on Bay Street. Excluding gasoline, inflation held steady at 3.6 per cent. Prices rose in all eight major components of CPI, paced by transportation costs. Inflation has exceeded the Bank of Canada’s target range of 1 to 3 per cent since April.
Canada’s inflation explained: How the surge affects you and what you can do about changing prices
Nearly two years into the COVID-19 pandemic, inflation is perhaps the hottest topic of discussion – and debate – in the field of economics. The U.S. and Europe are similarly dealing with their loftiest price increases in decades, piling pressure on policy-makers to respond.
The Bank of Canada has long maintained that steeper inflation is largely driven by temporary factors related to COVID-19, such as supply-chain issues. However, bank officials have acknowledged that supply woes are dragging on longer than expected. Now, the Omicron variant – which has already led to travel restrictions – poses another threat to supply chains.
“Worries about Omicron have contributed to lower oil prices, but beyond that the restrictions on mobility necessary to fight the rapidly-spreading variant will do little to help on the inflation front and may exacerbate price pressures in some areas,” James Marple, senior economist at Toronto-Dominion Bank, wrote in a note to clients.
“Supply chain disruptions are likely to be prolonged. Demand may take a hit, but with people staying home, it will be redirected toward goods, keeping upward pressure on already-elevated prices.”
Wednesday’s report showed price pressures on a number of fronts. Notably, inflation has accelerated for groceries, reaching 4.7 per cent in November (from October’s 3.9 per cent). It was the largest annual increase since the outset of 2015. Prices for fresh or frozen beef rose 15.4 per cent, owing to drought conditions that made it more expensive to feed livestock.
Statscan on Wednesday noted that inflation is running higher than average wage growth, which means the purchasing power of Canadians has diminished.
As inflation persists, the messaging at central banks has shifted.
The Bank of Canada dropped a reference to inflationary pressures being temporary in last week’s rate decision, which kept its benchmark lending rate at 0.25 per cent. Similarly, U.S. Federal Reserve chair Jerome Powell recently said it was time to retire “transitory” as a description of high inflation, because it has “different meanings to different people.”
Regardless, the Bank of Canada still expects inflation to ease in 2022, ebbing to around 2 per cent by the end of the year. It has signalled rate hikes could start as early as April.
Bank officials have said they’re watching for signs that lofty inflation becomes entrenched.
“If supply disruptions and related cost pressures persist for longer than expected and strong goods demand continues, this would increase the likelihood of inflation remaining above our control range,” deputy governor Toni Gravelle explained in a speech last week.
“This could feed into inflation expectations and contribute to wage pressures, leading to a second round of price increases,” he added.
Mr. Gravelle was alluding to a wage-price spiral. In that scenario, workers demand higher wages to counteract price increases. Faced with higher labour costs, companies raise prices to protect their margins. Then, workers push for higher wages again, creating a vicious cycle.
Despite those concerns, bank officials say inflation expectations aren’t troubling over the mid- to long-term, based on surveys of businesses and consumers.
There are, however, signs of pressure in the short term. Small businesses plan to raise prices by an average of 4.3 per cent over the next year, the highest in more than a decade of records, according to survey results from the Canadian Federation of Independent Business. Nearly one-third of companies are planning to hike prices by 6 per cent or more.
Canada’s inflation rate hit 4.4 per cent in September. Personal finance columnist Rob Carrick answers questions about some of the factors driving inflation and how people can reduce its impact on their household budget.
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