Inflation acceleration puts more pressure on Bank of Canada

Consumer price inflation showed the fastest growth pace in Canada last month over 30 years, increasing pressure on the central bank to start raising rates as soon as possible.

According to Statistics Canada, annual inflation reached 4.8% in December, going up by 0.1% from November. Such results coincide with economists’ forecasts.

The average of the Bank of Canada’s core measures (which is considered to be more accurate) went up to 2.93%, marking the highest number since 1991.

This report will intensify expectations that the BoC will begin a rate-increase cycle next week. Markets now expect 6 rate hikes during the next 12 months.

In its poll of business executives for the fourth-quarter, the central bank called the national economy increasingly hot, with widespread labor shortages, record inflation forecasts and strong demand. More than two-thirds of respondents expect annual consumer price growth to exceed 3% over the next two years. Almost 80% of businesses say they will have to accelerate wage increases in order to keep and attract workers.

The poll made economists accelerate their forecasts for the BoC to start raising its key lending rate. As you know, it has kept the overnight rate at historically low level of 0.25% since March 2020.

Inflation now has been exceeding the Bank’s 1-3% target range for nine consecutive months already, as global supply chain bottlenecks raise prices. Since Canada started targeting inflation in the early 1990s, the average result was about 1.8%.

Meanwhile, on a monthly basis, prices were down by 0.1% due to gasoline prices decline last month.