Canadian Inflation Hits Highest Growth In 31 Years, Experts See Interest Rates Surging

Canadian households were hit with the fastest rise in living expenses in over 3 decades. Statistics Canada (Stat Can) data shows the Consumer Price Index (CPI) annual growth for March was the highest in over 31 years. High crude oil prices have been the focus of most media attention, but the issue is much more broad. Broad inflation tends to not be transitory and requires monetary policy intervention. Some of Canada’s top economists have already weighed in to say this will require much higher rates — fast.

Canadian Inflation Grew At The Fastest Rate In 31 Years

Inflation ripped to the highest level in decades across Canada. CPI annual growth reached 6.7% in March, up 1 point from the month before. It was the largest annual growth since MC Hammer’s Too Legit To Quit (1991) was released. That’s right, you’re old and Canada hasn’t seen inflation like this in 31 years. 

Canadian Consumer Price Index Growth

The 12-month percent change for the Canadian consumer price index (CPI), used to measure inflation.

Source: Statistics Canada; Better Dwelling.

Canada Has Seen Gasoline Prices Rise Over 39%

Much of the cost of living discussion in the media has been around crude products like gasoline. The index shows the gasoline component of CPI is 39.8% from last year, and that’s going to pinch some budgets. However, when gasoline is excluded, CPI annual growth is still 5.5% — more than double the target rate. Inflation problems began before the invasion, and it’s accelerating with that additional pressure.

Canadian Households Are Paying 9% More For Grocery

Grocery is another area where consumers are seeing a massive pinch. Annual price growth jumped 8.7% in March, up from 7.4% a year before. Households saw the biggest jump in grocery prices since 2009. This was during a brief period where the US dollar rose against the loonie. The very short lived burst was largely due to commodities being priced in US dollars.

Canadian Consumer Price Index Growth Ex-Gasoline

The 12-month percent change for the Canadian consumer price index (CPI) with and without gasoline.

Source: Statistics Canada; Better Dwelling.

Stripping away food and energy products, CPI is still 4.6% higher than last year. That’s an important number because you can just stop eating, taking transportation, or heating your home to lower inflation. We jest. This demonstrates inflation is a broad problem, and this isn’t transitory. Eliminating volatile components still leaves CPI at double the 2% BoC target.

Canadians Are Seeing High Inflation Everywhere

Signs of broad inflation are everywhere, typically indicating a monetary policy issue. It’s one thing for your wages to be able to buy less oil because of a supply crunch. It’s a much bigger problem when your purchasing power against everything has vaporized.

Stat Can data shows 7 of the 8 major CPI components accelerated in March. The one hold out was apparel & footwear, since no one needs to leave the house. RBC similarly found 70% of goods and services are now rising faster than the BoC 2% target, using their own index. The bank warned this has persisted for the past six months. CPI isn’t just high — it’s accelerating.

Experts Say The Bank of Canada Needs To Raise Rates Sharply To Cool Inflation

Broad inflation acceleration requires aggressive monetary policy to tackle the issue. That’s the general consensus this morning from prominent finance experts that weighed in.  

RBC economist Claire Fan noted the broad inflation, and sees a sharp response from the BoC soon. “Accelerating inflation re-affirms the Bank of Canada’s decision to hike rates relatively aggressively and we expect the central bank to hike the overnight rate to 2.0% by October,” she said in a piece to clients.

BMO explained high CPI excluding gasoline makes a “mockery” of those who think this isn’t a BoC issue. “We have a full-on inflation issue, and the central banks need to play catch-up, with haste,” wrote Douglas Porter, BMO’s chief economist. 

“In turn, we continue to look for the Bank of Canada to crank interest rates to neutral as quickly as possible, pointing to 50 bp hikes at the next two meetings, and then keep grinding at a 25 bp cadence every other meeting thereafter, until rates are above the mid-point of their neutral range (i.e., above 2.5%).” 

Desjardins’ also sees broad inflation, seeing a super-hike at the BoC June meeting. “It’s clear that the Bank of Canada needs to continue to act ‘forcefully’ to quell further inflationary pressures. As a result, we expect central bankers will lift the policy rate another 50 basis points in June,” wrote Royce Mendes, head of macro strategy at Desjardins. 

From the highest inflation in over 3 decades to the highest interest rates in one decade. It’s hard to see consumers being comfortable for the next few years, but long-term results can be worth it. Rising rates can force capital to look for more productive growth. That can be a good thing over the long run, and help the economy get back on track towards more productive growth.