Canada’s inflation rate climbs to 7.7% in May, the highest since 1983

Motorists fill up in Ottawa.Spencer Colby/The Globe and Mail

Canadian inflation accelerated to its highest rate in nearly four decades in May, as calls grew for policymakers to find new ways to rein in runaway price growth.

The consumer price index (CPI) rose 7.7% in May from a year earlier, compared to 6.8% in April, Statistics Canada announced on Wednesday. It was the highest rate of inflation since 1983 and was part of a global price spike.

“We know that inflation keeps Canadians up at night; it keeps us awake at night,” Carolyn Rogers, Senior Deputy Governor of the Bank of Canada, told a Globe and Mail event on Wednesday. “And we won’t sit still until we get it back to the target,” which is 2%.

The recent spike in energy costs, fueled by the Russian-Ukrainian war, is having a tangible effect on the numbers. Gasoline prices rose 12% in May alone and 48% from a year earlier. the national average price for regular unleaded gasoline remains north of $2 per litre.

Yet consumers are feeling the pressure on multiple fronts — from rising costs in the grocery aisle and in furniture stores to high hotel rates and rising rents. At the same time, average wages are not keeping pace with inflation, which erodes purchasing power.

This is unlikely to be the peak of inflation either. Canadians are paying more for gasoline in June, putting additional upward pressure on consumer price growth. Several financial analysts said on Wednesday that the inflation rate could reach – or even exceed – 8% in the near future.

Central bankers embarked on their fastest pace of interest rate hikes in decades to get inflation under control. The Bank of Canada has raised its benchmark interest rate three times this year, bringing it to 1.5% from a pandemic low of 0.25%. The US Federal Reserve raised its benchmark rate by three-quarters of a percentage point last week, to a range of 1.5% to 1.75%.

The Bank of Canada will make its next rate decision on July 13. Most Bay Street analysts expect the central bank to match the Fed with its own 75 basis point hike.

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“The Bank of Canada needs to get pricing under control soon,” wrote Royce Mendes, macro strategist at Desjardins Securities, in a note to clients. “Accelerating inflation will likely force the Bank of Canada to raise rates by 75% [basis points]a gigantic decision central bankers should have made earlier this month. »

When asked if the bank would move 75 basis points in its next decision, Ms Rogers did not rule it out. “We will make the July decision when we arrive in July. We don’t have too long to wait,” she said.

Consumer prices rose rapidly for a variety of reasons, including supply chain disruptions that led to product shortages and high shipping costs; the Russian-Ukrainian war, which drives up the prices of raw materials such as crude oil and wheat; and excess demand for many goods and services. Wednesday’s inflation report showed the price increases are widespread and include many daily purchases for households.

Grocery prices rose 9.7% in May on an annual basis, matching the increase in April. Shelter costs rose 7.4%, also the same as in April. Mortgage interest payments are rising as Canadians begin to face higher interest rates, driving up inflation.

The reopening of the economy has also contributed. Costs have increased 40% for traveler accommodation over the past year and 6.8% for restaurant meals.

The May report also included used car prices in the CPI for the first time. Previously, Statscan used changes in new car prices as a proxy for the used car market. The agency noted that prices for used passenger vehicles rose 2.2% in May from April.

Prices in global stock markets have plunged recently as investors are wary of the state of the economy. Central bankers are trying to rein in inflation by raising interest rates, but without plunging the economy into a recession – a “soft landing” that investors see as increasingly unlikely.

Lately there have been growing calls for governments to play a bigger role in fighting inflation. On Sunday, the Bank of Nova Scotia released a report urging the federal Liberals to do their part to reduce demand in the economy by limiting government spending, including through its operational spending.

“If you can get government spending cuts – it’s not program spending, it’s how government works – you’d probably have an easier time controlling inflation, and at a lower cost to households,” he said. Jean-François Perrault, chief economist at Scotiabank.

Deputy Prime Minister Chrystia Freeland told a Bay Street audience last week that $8.9 billion in previously announced measures will help various Canadians with living expenses, including a 10% increase in Security old age benefits for people over 75 and increased funding for children. care. Ms Freeland did not announce any new measures that day.

“I wouldn’t characterize this as inflation-fighting talk,” Perrault said. “They didn’t go any further and say, ‘Listen, we’re rethinking our spending profile for the next year or two in light of inflation concerns. “”

On Wednesday, US President Joe Biden called on Congress to suspend the federal gasoline tax for three months. Ms Freeland said this week she would not rule out any policy options to tackle inflation, but noted that a cut in petrol taxes would hamper efforts to cut the deficit, and she pointed to refunds of the carbon tax that households already receive.

The Bank of Canada’s rate hikes were quick to trickle down to the housing market, which saw lower sales volumes and prices this spring, particularly in parts of British Columbia. and Ontario.

Ms Rogers said the central bank was watching the housing sector “very, very closely”. However, she noted that 35% of people have active mortgages — the rest are renting or have paid off their homes — while everyone is buying groceries.

“Most people fill up their cars. Inflation hurts everyone. So our number one goal is to bring inflation down.

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