Acceleration Of Canada’s Annual Inflation Rate Threatens To Peak 3% In Spring

Canada’s headline inflation reached 1% in January. This exceeded economists’ prediction of 0.9% and a year-over-year increase of 0.7% in December. Figures above 1% have not been recorded since a year ago when inflation rose 2.2% compared to February 2019. Canada’s provinces of Newfoundland, Labrador, Nova Scotia, Quebec, Ontario, and British Colombia all recorded over 1% inflation rates.

While core inflation rose to 1%, CPI-trim reached 1.8%, up from 1.6%. CPI-median also rose slightly to 1.4% from 1.3%, while CPI-common remained unchanged at 1.3%.

It is believed that the strengthening in prices seen in January may be attributed to rising gas prices. According to Statistics Canada, gas prices rose 6.1% compared to December. However, the prices were still 3.3% lower than in January 2020. This increase may have been in part boosted by growing sales in passenger vehicles. There has been a greater availability of new models in January than there was the same period a year ago.

Energy prices are expected to rise further. The WTI crude prices swelled past $60 a barrel for the first time in about a year. This surge may be due to reduced output caused by the severe cold snap that has hit many of North America’s refineries and oil fields.

Increased houses prices driven by growing demand for larger homes and access to lower interest rates are also believed to be contributing factors by the Conference Board of Canada’s Anna Feng. While uncertain how long this demand for housing will last, Feng remains confident it will continue to contribute to inflation figures.

Investors appear to be positioning themselves for a likely inflation spike in the coming months, even as central bank liquidity floods the market. However, even with the likelihood that inflation will rise to 3%, the Bank of Canada is unlikely to change policy. Senior Economist at CIBC Capital Markets, Royce Mendes, believes the central bank will still consider the impact the pandemic continues to have on the economy.

Bank of Canada has confirmed that it intends to retain the overnight rate at 0.25% at least till 2023 when the economy is expected to be back on track. It will, however, reassess its 2% inflation target at the end of 2021. Financial experts like Robin Marshall of FTSE Russell, believe that central banks have good reason to remain relaxed about recovery and inflation, even with a temporary overshoot of 3-4%.

Mendes affirms that continued support from both fiscal and monetary policymakers will be needed for the economy to recover from the effects of the pandemic. There are hopes that once the pandemic is over, inflation rates will no longer be subdued. As infection rates tumble and measures are relaxed, people are expected to go out more to travel and shop. This influx of spending and demand is expected to hasten price growth.