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Inflation Surges To 7.7% In Canada, Fastest Pace Since 1983

Consumer price inflation accelerated to a four-decade high, adding pressure on the Bank of Canada.

Inflation Surges to 7.7% in Canada, Fastest Pace Since 1983
Inflation Surges to 7.7% in Canada, Fastest Pace Since 1983

Consumer price inflation accelerated to a four-decade high, adding pressure on the Bank of Canada to deliver more aggressive interest rate hikes in coming weeks.

Annual inflation rose to 7.7% last month, up from 6.8% in April, Statistics Canada reported Wednesday in Ottawa. That’s the highest since January 1983 and well above economist expectations for a 7.3% increase. The inflation gauge rose 1.4% from a month earlier with gasoline, hotel rates and cars among the largest contributors to the gains in May.

The average of core measures -- often seen as a better indicator of underlying price pressures -- rose to 4.73%, a record in data back to 1990.

Benchmark Canadian two-year yields dropped as low as 3.269% amid a global rally in government bonds. The Canadian dollar pared losses to trade at C$1.2968 per U.S. dollar as of 8:56 a.m.

Inflation Surges To 7.7% In Canada, Fastest Pace Since 1983

Wednesday’s report illustrates the urgency for Governor Tiff Macklem to quickly withdraw stimulus from an overheating economy amid concern price pressures are becoming entrenched in the economy.

Markets are now fully pricing in a 75-basis-point rate hike by the Bank of Canada next month, which would bring its policy rate to 2.25%. That rate is expected to reach as high as 3.5% by the end of this year. Prime lending rates offered by commercial banks are typically a little more than 2 percentage points above the policy rate.

“There was no rest for those of us growing weary of escalating inflationary pressures in May,” Andrew Grantham, an economist at Canadian Imperial Bank of Commerce, said in a report to investors. “The higher than expected inflation figure will have markets pricing an even greater probability of a 75bp hike in July.”

Political Fallout

Prime Minister Justin Trudeau’s government has also been under pressure from opposition parties and economists to do more to stem inflationary pressures and help households offset the cost of living, though his administration has been wary of taking any new measures.

Like other countries, Canadian households are being hit by record gasoline prices, paired with surging food costs. 

After a small reprieve in April, gasoline prices shot up again in May, rising 12% during the month and gaining 48% from a year earlier. Food costs rose a smaller 0.8% last month, but are up 8.8% from a year earlier.

The 7.7% annual reading may not even represent the peak, given that gasoline prices have picked up further in June.

There are also more signs that imported inflation is spilling over into domestic price gains, with the cost of services rising 5.2% from a year earlier, the fastest pace since 1991.

What Bloomberg Economics Says...

“Food and energy prices factored heavily in the surprise, but the full range of core measures also accelerated -- leaving little in the way of nuance that might argue against stepping up the pace of hikes next month.”

--Andrew Husby, economist

For the full analysis, click here

Excluding food and energy costs, inflation was also up 5.2% -- a three-decade high.

The cost of living is increasing at twice average wage gains in the country, adding a major headwind to the economy. 

Wednesday’s report includes updated basket weights, as well as the inclusion of used car prices for the first time. The statistics agency said the changes didn’t have an impact the consumer price index for May.

The inflation surge has made the Bank of Canada a target of criticism, with some politicians accusing Macklem of moving too slowly.

The central bank has consistently failed to anticipate the growing inflationary pressures, putting it well behind the curve on interest rates. In its last quarterly forecast in April, the central bank predicted inflation would average 5.7% in the first half of 2022.

(Updates with details throughout.)

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