Canada’s Oldest Bank Sees Much Higher Inflation As Commodity Prices Rise

Expectations for higher inflation in Canada are rising as it spreads to more components. BMO Capital Markets’ latest forecast contained upward revisions for the consumer price index (CPI). The measure of inflation is expected to rise faster this year as the commodity prices soar. The gap between the Bank of Canada (BoC) forecast and BMO is getting wider, as the former believes inflation will go away on its own. 

BMO Made An Upward Revision For Inflation This Year

The forecast for the Canadian consumer price index (CPI) is rising in value fast. BMO expects 4.7% annual growth for the 2022 CPI, up from 4.5% in the previous forecast. Most of the increase shows rising expectations in the second half of the year. 

Breaking it down quarterly, all quarters are now forecast to see higher inflation. The first three quarters of 2022 are forecast at 0.2 points higher per quarter. In the fourth quarter it made a big leap at double the size — 0.4 points from the previous forecast. Recent expectations have been breaking higher as low rates persist longer than expected. 

Bank of Canada Is Expecting A Lot Less, But Their Forecast Has Been Rising

The CPI forecast is climbing more aggressively than the BoC expects. The central bank last forecast 4.2% annual growth for 2022, up from their previous forecast of  3.2% growth. Independent expectations are rising very quickly, as fewer people see monetary policy moving fast enough to cool inflation. 

More Inflation Expected Due To Higher Home And Commodity Prices

The primary reason for the adjusted expectations is related to rising commodity values. BMO cited rising aluminum, nickel, wheat, and corn as some of the reasons costs will be driven higher. The “Russia-Ukraine crisis” is sparking further reason to believe prices will rise. Lumber prices and oil are also both back with a fury. Then there’s real estate, with elevated land prices turning into an input cost for everything. 

Higher inflation expectations are rising across the economy, especially for commodities. There are two takes in how this plays out. On one side is the US Federal Reserve that had called it an inflationary shock, with the belief higher rates will be needed to slow inflation. RBC has also agreed, calling for higher rates before inflation in Canada becomes sticky. 

On the other side is the BoC, which believes inflation is due entirely to outside forces. They see inflation largely going away on its own at a later point, when supply chains catch up. Of course, they’ve been saying that for the past year, slowly ratcheting up their inflation forecast. Technically everything is transitory on a long enough timeline, right?