Inflation in Canada reaches 4.7% for the first time since 2003

Last month, Canada’s inflation rose to its highest level in almost 20 years, increasing pressure on the central bank to start raising rates.

The consumer price index was up by 4.7% in October on a year-over-year basis, following a 4.4% gain seen in September, Statistics Canada says. Such a number is the highest since 2003, when it was the last time index reached 4.7%. Inflation hasn’t exceeded this result in 30 years, since the Bank of Canada started setting a target inflation in 1991.

October’s growth coincides with the median estimate of economists polled by Bloomberg. A monthly comparison shows an increase by 0.7%, which was also expected.

It’s the seventh month in a row that inflation exceeds 3% – the upper limit of the BoC’s control range. Such results strengthen worries over price pressures being more persistent than expected. Last month, inflation concerns made the Bank signal it may start raising interest rates early in 2021.

However, all central banks worry that tightening monetary policy too fast and too sharply may stop a pandemic recovery that is still incomplete.

“It’s definitely lasting much longer than anyone expected, and unfortunately we won’t see improvements in terms of supply and a pullback on commodity prices at least until the end of the year,” – Sal Guatieri, a senior economist at BMO Capital Markets, noted.

According to markets’ forecasts, the BoC will raise its benchmark overnight policy rate from today’s 0.25% to 1.5% over the next 12 months.

Although central bank keeps saying the inflation is mostly pushed by temporary factors linked to energy prices and supply constraints, it’s disturbing that inflationary pressures may become embedded in expectations.

In case inflation continues to show the same growth pace, it may lead to a wage-price spiral which is hard to control. Wages have growth more slowly in Canada than in the U.S. Average hourly wages were up by 2.1% during the previous 12 months, which is less than half the inflation pace.

The largest increases were reported in the sectors of energy, shelter and food prices, with gasoline also showing strong results of a 5% monthly gain and a 42% annual hike.  The global chip shortage kept influencing the production of autos, with prices for cars rising by 6.1% from a year ago.

 

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