Annual inflation rate climbs to 3.6 per cent in May, highest in a decade
Published Wednesday, June 16, 2021 4:33AM EDT Last Updated Wednesday, June 16, 2021 8:48PM EDT
OTTAWA -- Prices across the country rose at their fastest annual rate in a decade last month, with the promise of similar numbers through to the fall as the national economic reopening from pandemic measures allows consumers to spend more freely.
Statistics Canada said the 3.6-per-cent increase in the consumer price index in May was the largest yearly increase since May 2011 and outpaced the 3.4 per cent reading in April, which at the time was the fastest annual rate in nearly a decade.
Part of the rise in inflation is due to comparing prices to the low levels seen last year at the start of the pandemic for such items as gasoline, furniture and beef products.
However, Statistics Canada said the increase in year-over-year price growth in May wasn't solely because of this comparison. It noted more recent price pressures are also driving inflation, with rising housing costs among the leading reasons.
Adding to that are supply-chain issues that have made it more expensive to build new homes or cars, with costs being passed along to consumers.
The pickup in prices has come even as public health restrictions held back activity in high-contact sectors, said TD senior economist James Marple, noting the acceleration in inflation has come faster than forecasters and the Bank of Canada expected.
Prices are expected to rise over the summer as provinces ease public health restrictions, businesses look to make up for lost revenues and consumers have more places to spend their cash.
"Retailers have had a very tough time, bars and restaurants have had a very tough time over the past year and they're going to want to make up for some of that lost ground with higher prices," CIBC senior economist Royce Mendes said.
"They're going to want to pass on those costs and the key to remember here is that consumers can actually absorb those costs, maybe like never before because of all the savings that is built up during the pandemic."
The Bank of Canada expects inflation to hover around three per cent over the summer before easing later this year, then returning toward the bank's two per cent target, once prices stop being compared with the lows seen in March and April of last year, and as supply-chain issues work themselves out.
Separately Wednesday, the U.S. Federal Reserve raised its forecast for inflation south of the border to 3.4 per cent by the end of this year, from 2.4 per cent in its previous projection in March. The American central bank also expected to raise its benchmark short-term rate twice by late 2023, after previously estimating no rate hike before 2024.
The longer inflation stays high, the more people will come to expect it, and create a feedback loop of higher wage demands followed by offsetting price increases, said Thorsten Koeppl, an economics professor at Queen's University in Kingston, Ont.
Inflation takes off in this scenario and isn't consistent with the central bank's target, he said, meaning one thing: "You have to raise rates."
"For me, monetary policy is always controlling inflation expectations at the end of the day."
Excluding gasoline, which was up 43.4 per cent compared with the same month one year ago, the consumer price index would have been up 2.5 per cent.
Statistics Canada said the average of the three measures for core inflation, which are considered better gauges of underlying price pressures and closely tracked by the Bank of Canada, was 2.3 per cent in May, up from 2.1 per cent in April. The reading in May was the highest seen since April 2009.
BMO director of Canadian rates Benjamin Reitzes said in a note that while it's still too early to say whether firmer inflation is here to stay, the persistent strength in the figures may make the central bank a bit less comfortable with its accommodative monetary policy.
The Bank of Canada intends to keep its key policy rate at 0.25 per cent until the economy has recovered and inflation is sustainably back on target, which is expected to happen in the second half of 2022.
During a Senate committee appearance later Wednesday, governor Tiff Macklem warned the timing is "unusually uncertain given the difficulties in assessing the economy's supply capacity."
The Statistics Canada report said homeowner replacement costs, which includes prices for new housing, rose 11.3 per cent year-over-year in May, the largest increase since 1987. With the jump in May, Statistics Canada said that now makes 16 consecutive months of price increases driven by buyers looking for larger homes and higher construction costs.
Durable goods like vehicles were up 4.4 per cent in May from their levels in May 2020, which the statistics agency noted came against the backdrop of low interest rates and rising consumer confidence.
- With files from The Associated Press
This report by The Canadian Press was first published June 16, 2021.