Statistics Canada’s consumer price index, the gauge the Bank of Canada uses to guide interest rates, emerged to 8.1 per cent in June, the biggest year-over-year increase since January 1983. Here’s what you need to know:
Cooking with gas
The acceleration from May’s 7.7-per-cent reading was mostly the result of gasoline prices, which increased 54.6 per cent from June 2021, compared with a year-over-year gain of 48 per cent the previous month.
Oil prices peaked in early June, and have since eased somewhat, suggesting the July numbers will be less severe. However, inflation has spread well beyond gasoline stations. When Statistics Canada subtracted gasoline from the consumer price index, it still came up with a year-over-year increase of 6.5 per cent, compared with 6.3 per cent in May.
Seven of eight major components posted increases bigger than three per cent, which is the high end of the Bank of Canada’s comfort zone for inflation. The central bank targets two per cent, and the latest figures support policymakers’ decision last week to increase the benchmark lending rate by a full percentage point.
Some Bay Street economists were predicting even faster inflation. It might be too soon to say for sure, but the rapid cooling of the housing market could be offsetting inflationary pressures elsewhere. Statistics Canada’s index of shelter costs increased 7.1 per cent in June, slower than 7.4 per cent in May. The agency observed that real-estate agents are collecting lower commissions because prices have dropped.
The cost of living is increasing faster than wages, so something has to give. The economy is almost certainly headed for slower economic growth, as higher interest rates have triggered a correction in housing markets and surging food and fuel costs are draining consumer disposable income that might otherwise be used to buttress broader consumption. How much slower? The Bank of Canada predicted last week that gross domestic product will increase 1.8 per cent in 2023, down from 3.5 per cent this year. Bank of Nova Scotia’s economics team said this week that it sees growth of 1.6 per cent next year, as pent-up demand from the pandemic offsets headwinds from higher interest rates. Royal Bank of Canada economists think we’re headed for a recession. Regardless, a soft landing is getting harder and harder to execute. The central bank said last week that more interest-rate increases are coming, and the new inflation reading suggests it will be another supersized hike when policymakers next gather in September. That could push the benchmark rate above three per cent, which could be a challenge for consumers, executives and investors who had got used to borrowing costs closer to zero.
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