Canada’s inflation skyrockets to the highest level since 1983 – is a 1% rate hike possible in July?

In May, consumer price inflation in Canada reached the highest mark in 40 years, increasing pressure on the Bank of Canada to act even more aggressively in terms of the future rate hikes.

According to Statistics Canada, annual inflation went up to 7.7% last month, following 6.8% seen in April. It’s the highest number since January 1983 and well above 7.3%, expected by economist. The inflation hike was 1.4% on a monthly basis, with gasoline, hotel rates and cars reporting the largest increases.

The average of core measures, which tends to show a more vivid picture, was up to 4.73%, marking a record number since 1990.

This report shows the urgency for Governor Tiff Macklem to quickly withdraw stimulus from an overheating national economy amid worries that price pressures will remain for long.

Now, markets are fully predicting a 0.75% rate increase by the BoC in July, pushing the overnight rate to 2.25%. In addition to it, the rate is expected to reach 3.5% by the end of 2022. Prime lending rates offered by commercial banks are usually slightly more than 2% above the policy rate (today at 3.70%).

Prime Minister Justin Trudeau’s government also feels pressure from opposition parties and economists who demand more actions aimed at reducing inflationary pressures and helping households offset the cost of living. However, the administration has been not very eager to take new measures.

Canadian households are facing record gasoline prices combined with growing food costs.

Following a small relief in April, gasoline prices rose sharply in May by 12% from the previous month and by 48% on a year-over-year basis. Food prices showed a 0.8% monthly increase and an 8.8% annual hike.

The main issue is the fact that 7.7% may be not the end, as gasoline prices kept rising in June.

In addition to it, there are also more signs that imported inflation is spreading all over into domestic price gains, with the cost of services going up by 5.2% from a year earlier and marking the fastest pace since 1991.

The cost of living is growing at twice average wage increases, which is another challenge for Canada’s economy.

The inflation hike has caused a lot of criticism at the BoC, with some politicians saying Macklem is actually acting too slowly.

The Bank hasn’t predicted the growing inflationary pressures. In its quarterly forecast in April, the BoC expected an average inflation of 5.7% for the first half of this year.

Amid the new data, strategists from JPMorgan now believe even a 1% rate increase is possible in July.

“The inflation clearly isn’t slowing down, and the central bank has to show its ability to act more aggressively in order to restrain the inflation”, – the strategists said in a recent report.

“Now, we believe there’s a risk of a 1% rate increase in July.”