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March 16, 2022

Canada’s inflation rate hits three-decade high in February as central banks look to tame spiking price pressures

Canada’s inflation rate hit a new three-decade high in February as consumers paid sharply more for gasoline and groceries, highlighting the tough task ahead for central bankers looking to calm the situation.

The Consumer Price Index rose 5.7 per cent in February from a year earlier, up from January’s 5.1-per-cent pace, Statistics Canada said Wednesday. It was the 11th consecutive month that inflation has surpassed the Bank of Canada’s target range of 1 per cent to 3 per cent.

Shelter costs in Canada rose 6.6 per cent, the largest annual change since 1983. Groceries rose 7.4 per cent, the highest in more than a decade. And gas prices jumped 6.9 per cent in the month of February alone as the Russia-Ukraine war led to volatility in energy markets.

“If it feels like everything is getting more expensive, it’s because it is,” said Royce Mendes, head of macro strategy at Desjardins Securities, in a note to clients.

Earlier this month, the Bank of Canada raised its benchmark interest rate for the first time since 2018, and its U.S. counterpart, the Federal Reserve, is expected to follow suit on Wednesday afternoon. The U.S. inflation rate hit 7.9 per cent in February, the highest in 40 years.

Central bankers could be forced to tighten monetary policy in aggressive fashion to dampen inflation, which is running higher for longer than they previously assumed. In a speech last week, Bank of Canada Governor Tiff Macklem said steep inflation is spreading to more products and services, and he would not rule out a rate hike of 50 basis points later this year. (A basis point is 1/100th of a percentage point.) A hike to that degree has not occurred in over 20 years.

The latest threat to consumer prices is the Russia-Ukraine war, which has led to surging costs of wheat, gasoline, fertilizer and other products, on fears of supply shortages. There is, however, very little that central bankers can do to calm volatility in global commodity markets.

The concern is that consumers, who are sensitive to price hikes at gas pumps and supermarkets, come to think that steep inflation is a long-term reality.

Inflation can be self-fulfilling, in that companies set prices and workers negotiate wages in anticipation of expected costs. Their expectations have risen substantially for the next couple years, but remain “well anchored” over a five-year horizon, the central bank has said.

Not everyone agrees. The Bank of Nova Scotia said Tuesday that inflation expectations have already become unmoored. “This recent de-anchoring of expectations means that the bank’s monetary policy will need to be more aggressive to bring inflation back to target,” read the report, which was co-written by a former research director at the Bank of Canada.

Scotiabank estimates the Bank of Canada’s policy rate – now at 0.5 per cent – will end the year at 2.5 per cent, by far the most aggressive course of tightening projected by a major bank.

In turn, that will heap pressure on a Canadian consumer that’s loaded up on debt over the pandemic. The household debt burden – more formally known as the ratio of credit market debt to disposable income – rose to 186 per cent in the fourth quarter, the highest on record. The pandemic debt surge has been entirely driven by demand for residential mortgages.

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