Inflation in Canada climbs to 8.1%, the largest increase in nearly 40 years

Kevin Carmichael: Conclusion: A soft landing is getting harder and harder to execute

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Statistics Canada’s consumer price index, the indicator used by the Bank of Canada to guide interest rates, rose to 8.1% in June, the largest year-on-year increase in other since January 1983. Here’s what you need to know:

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cooking with gas

The acceleration from May’s 7.7% reading was mainly the result of gasoline prices, which rose 54.6% from June 2021, compared with a year-over-year gain. another 48% the previous month.

Oil prices peaked in early June and have since declined somewhat, suggesting July’s numbers will be less severe. However, inflation has spread far beyond gas stations. The consumer price index still posted a year-over-year increase of 6.5% after Statistics Canada removed gasoline, compared to 6.3% in May.

Seven of the eight major components posted increases above 3%, which is the upper limit of the Bank of Canada’s inflation comfort zone. The central bank is aiming for two percent.

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Governor Tiff Macklem will not be shocked by the new inflation figures. According to the latest forecast from the Bank of Canada, the consumer price index shows average annual increases of 8% in the third quarter and average gains of around 3% at the end of 2023. That is far from the objective is why policymakers have raised borrowing costs. a full percentage point last week.

slight relief

Some Bay Street economists predicted even faster inflation. It may be too early to say for sure, but the rapidly cooling housing market could offset inflationary pressures elsewhere. Statistics Canada’s housing cost index rose 7.1% in June, down from the 7.4% posted in May. The agency observed that real estate agents earn lower commissions because prices have fallen.

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In the short term, higher interest rates could put upward pressure on housing costs because mortgages will increase. However, if house prices continue to fall, “this could lead to higher rates to more quickly mitigate high inflation in Canada relative to the United States,” said Veronica Clark, economist at Citigroup Global Markets Inc., in a note to its customers. “This is a fundamental reason why we still believe that policy rates could end up slightly lower in Canada than in the United States”

Another sign that inflation may be peaking is a deceleration in the pace of month-to-month increases. The consumer price index rose 0.7% from May, which is considerably slower than the previous monthly increase of 1.4%. Commodity prices are finally reacting to gravity, and this could affect the cost of finished goods in the months to come.

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The release “indicates some potential positive news on the price front,” Randall Bartlett, an economist at Desjardins Group, said in a note, before adding that the news was not so positive that it will prevent the Bank of Canada to increase the price. reference rate by half a point or three quarters of a point in September.

  1. Governor of the Bank of Canada, Tiff Macklem.

    Tiff Macklem’s soft landing could hinge on business confidence

  2. Tiff Macklem, Governor of the Bank of Canada, at the Bank of Canada in Ottawa in April.

    Exclusive: Tiff Macklem on the Bank of Canada’s surprise rate hike, the fight against inflation and his missed forecasts

  3. Bank of Canada Governor Tiff Macklem enters the central bank's offices in Ottawa.  Macklem announced a 100 basis point rate hike on Wednesday, surprising economists and consumers.

    What you need to know about the Bank of Canada’s 1% hike

At the end of the line

The cost of living is rising faster than wages, so something has to give. The economy is almost certainly heading for slower economic growth as higher interest rates have triggered a correction in housing markets and soaring food and fuel prices are depleting consumers’ disposable income that might otherwise be used to support wider consumption.

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How much slower? The Bank of Canada predicted last week that gross domestic product will grow 1.8% in 2023, up from 3.5% this year. The Bank of Nova Scotia’s economic team said this week it expects 1.6 per cent growth next year as pent-up demand from the pandemic offsets headwinds from rising interest rates . Royal Bank of Canada economists believe we are heading for a recession. Either way, a soft landing is getting harder and harder to execute.

The central bank said last week that more interest rate hikes were ahead, and the new inflation reading suggests it will be another oversized hike when policymakers meet next. in September. That would push the benchmark rate above 3%, which could be a challenge for consumers, executives and investors who have become accustomed to borrowing costs closer to zero.

• Email: [email protected] | Twitter: carmichaelkevin

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