Canada’s inflation reached its highest level since 2011 in May

Last month, inflation in Canada rose to its highest level in 10 years, but policy makers say it’s only a temporary change.

According to Statistics Canada, consumer prices rose by 3.6% in May compared to a year earlier, marking the fastest annual growth since May 2011. This gain followed a 3.4% increase reported in April. Meanwhile, economists expected 3.5% for the last month. The prices were up by 0.5% from April, while the forecast was for 0.4%.

In addition to it, core inflation, which is considered to be a more accurate measure of price pressures, was up from 2.1% to 2.3%, which is the largest number since 2009.

However, the central bank is sure the increase was caused by mostly temporary factors. The annual results are distorted by annual comparisons, as the price were down sharply a year ago, when the pandemic started. This phenomenon is called the base effect. Price pressures are also increasing as businesses try to balance a strong demand amid the lack of materials.

Nevertheless, the Bank of Canada believes the on-going excess supply in the economy will bring the prices down as soon as the base effects fade over the next months. But in case the inflation turns out to be more resilient, the BoC may have to start raising interest rates earlier. For now, investors aren’t predicting it until later next year.

The Bank expects inflation to remain close to 3% during the next several months before starting to go down. Governor Tiff Macklem will probably repeat this message during his speech before Canadian senators.

Almost the same phenomenon also pushed the U.S. inflation last month to an annual 5% gain. Canada’s inflation is lower because of a slower economic reopening and the latest rise in the Canadian dollar that is lowering prices for imported goods.

Growing prices for cars were among the main drivers of inflation in May. They showed a 5% annual increase, partially because of supply chain problems related to a lack of semiconductor chips all over the world. Gasoline cost was also up by 43% from a year ago, when prices were still under the influence of the pandemic lockdowns.

Another factor affecting Canada’s inflation is the hot real estate market with its strong demand for single family houses and growing prices for construction materials. The costs of homeownership rose by 11.3% annually, marking the biggest year-over-year gain since 1987.