Canadian Inflation Hits An 18 Year High, and It’s Understated: National Bank

The cost of living in Canada is now surprising even the experts, with price growth surging. Statistics Canada (Stat Can) data shows Consumer Price Index (CPI) annual growth surged higher in September. The measure of inflation has been running hot recently, but now it’s hit the highest level in 18 years. One of the country’s “Big Six” banks thinks it’s underreported, and even so — expects it will run higher.

Canadians Haven’t Seen The Cost of Living Rise This Fast Since 2003

Canadian CPI is showing some of the largest growth in a generation. This morning’s official data shows CPI printed 4.4% annual growth in September. This is up from the 4.1% reported just a month before, and marks the ninth month of acceleration. The rate was last this high all the way back in 2003. Of course, interest rates weren’t near zero back then, and central banks weren’t in such a tight spot.

National Bank of Canada (NBC), one of the Big Six, said CPI growth continues to surprise above expectations. Not their forecast, since they’ve been calling higher inflation for a few months. Inflation data has surprised the consensus estimate for five of the past six months. As bad as that sounds, CPI growth should surprise to the upside for the next few months. 

Canadian Consumer Price Index

Canadian Inflation Is Being Understated

“The annual figures understate the recent trends for both headline and core inflation, as our in-house replications of CPI-Median and CPI-Trim are showing prints above historical norm again this month (0.29% and 0.31% respectively) while the 6-month annualized rates stand at 3.4% and 4.2% respectively,” said NBC deputy chief economist Matthieu Arseneau. 

For those not fluent in bankster, that means alternative measures show higher inflation, and the growth is recent. This is contrary to the Bank of Canada (BoC) narrative that this is due solely to a year-over-year comparison. Earlier this year, NBC had also said the BoC is discrediting its own inflation research. 

Separately, NBC also said the recent changes to methodology used for CPI will  chronically underestimate inflation going forward. This is an argument we made for similar reasons, just a few weeks before. Inflation is high, but people who follow methodology closely realize it’s even higher than reported. 

Despite All Of The Surprises, The Bank of Canada Is Sticking To The Narrative

Despite chronic underestimation, the central bank will stick to a transitory narrative. It has to. “When the BoC makes its rate decision and releases its Monetary Policy Report next week, we expect that it will maintain its view that this is largely due to transitory factors,” he said. Adding, “[the Bank of Canada will be] acknowledging that these factors are more persistent than expected.” 

The BoC governor might seem a little off the mark. Especially if you heard him say inflation is both temporary and persistent the other day. However, his job involves setting the public’s expectations, since expectations influence prices.

This was seen with lumber recently, which had been surging in prices. Lumber execs flat out told lumber buyers to just hold off, until prices fell. Prices fell shortly afterward — not quite to pre-pandemic levels, but lower. The governor is essentially hoping he has the same credibility with the public that lumber execs have with buyers. That doesn’t appear to be the case, according to the BoC’s latest survey data. 

Canadian Inflation Will Continue To Surprise To The Upside

The narrative is transitory, but more inflation surprises are coming in the future. “For our part, we still believe that inflation could continue to surprise the central bank on the upside,” said Matthieu.  

“With continued supply chain disruptions and the rise in food commodity prices, price pressures could persist for some time. Additionally, labor shortage indicators are currently pointing to potential wage push inflation in the coming months as workers appear to have the bargaining power to demand compensation.”  

If the central bank fails to manage inflation expectations, it may be forced to hike rates. That can dampen credit growth, but segments like mortgages can use some cooling. Though discussing that might make us wonder why rates are still this low in the first place.

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