Holy Smokes! Canadian Inflation Is At 6.7%

General Michele McGarvey 25 Apr

Canadian Inflation Spikes to 6.7% in March.

StatsCanada today reported that consumer prices rose a whopping 6.7% year-over-year in March, a full percentage point above the 5.7% reading the month before. Market-driven interest rates shot up on the news as the prospects increase for another half-point rise in the overnight rate when the Bank of Canada meets again on June 1. 

There is no sugar-coating this. Bonds were walloped as the Government of Canada two-year yield shot up to 2.6%, the 5-year yield rose to 2.75%, and the 10-year yield spiked above 2.825% immediately following the data release. The 5-year yield–so crucial for setting the 5-year fixed mortgage rate–has nearly quadrupled over the past year.

Inflationary pressure remained widespread in March, as prices rose across all eight major components. Prices increased against the backdrop of sustained price pressure in Canadian housing markets, substantial supply constraints and geopolitical conflict, which has affected energy, commodity, and agriculture markets. Further, employment continued to strengthen in March, as the unemployment rate fell to a record low. In March, average hourly wages for employees rose 3.4% y/y, raising the risk of wage-price spiralling.

Excluding gasoline, the Consumer Price Index (CPI) rose 5.5% year over year in March, the fastest pace since introducing the all-items excluding gasoline special aggregate in 1999, following a 4.7% gain in February.

The CPI rose 1.4% in March, following a 1.0% gain in February on a monthly basis. This was the largest increase since January 1991, when the goods and services tax was introduced. On a seasonally adjusted monthly basis, the CPI rose 0.9% in March, matching the most significant increase on record.

In March, gasoline prices rose 11.8% month over month, following a 6.9% increase in February. Global oil prices rose sharply in March because of supply uncertainty following Russia’s invasion of Ukraine. Higher crude oil prices pushed prices at the pump higher. Year over year, consumers paid 39.8% more for gasoline in March.

Month over month, prices for fuel oil and other fuels rose 19.9%, the second-largest increase on record after February 2000. On a year-over-year basis, prices for fuel oil and other fuels rose 61.0% in March.

Food prices continued to surge, as did the prices of durable goods such as automobiles and furniture. It cost considerably more for restaurants, hotel rooms and flights.

Goods inflation hit 9.2% in March, the highest since 1982. Services inflation rose to 4.3%, the highest since 2003.


Bottom Line

Bond markets sold off all over the world today. The yield curves flattened as shorter-term yields rose more than their longer-dated counterparts, reflective of the view that central banks will accelerate their tightening.

Today’s CPI report shows inflation pressures were more elevated than the Bank of Canada expected just last week when they hiked the policy rate by 50 basis points.

This could well mark the top of the surge in inflation, but the return to the 2% inflation target could be prolonged, particularly if inflation expectations become embedded. For this reason, Governor Macklem is likely to tighten aggressively once again on June 1, which will further dampen housing activity.


written by DLC Chief Economist Dr. Sherry Cooper

Labour Market Tightens Further

General Michele McGarvey 11 Apr

Another Strong Canadian Jobs Report–We Are At Full Employment.

Statistics Canada released the March Labour Force Survey this morning, reporting a 72,500 jobs gain from the whopping 337,000 surge in February. Employment increased in both the goods- and services-producing sectors. Gains were concentrated in Ontario and Quebec. The unemployment rate fell to 5.3%, its lowest monthly rate since the data series was released in 1976, compared to 5.5% in February.

This adds more fuel to the notion that the Bank of Canada is behind the curve and will likely raise the overnight policy rate by 50 basis points next week. Indeed, Canada’s 2-year government note yield spiked on the news to 2.46%, up 2.38% at yesterday’s close.

Swap markets are now predicting a 75% probability of a half-point hike next week and an overnight rate of 3% a year from now. The overnight rate was 1.75% in February 2020, just before the pandemic began. Since then, inflation has surged from just over 2% to 5.7% in February. The March inflation data will be released on April 20, and it is widely expected to rise further. Indeed, the gauge of global food prices inflation is currently at a record high, exacerbated by the disruptions associated with the Ukraine war.

Adding to inflationary pressure is the rise in Canadian wage rates coming from the excess demand for labour. Total hours worked rose 1.3% in March. Average hourly wages increased 3.4% on a year-over-year basis, up from 3.1% in February. Illustrating the imbalances between labour supply and demand, employment gains since September (+463,000; +2.4%) have outpaced growth in the size of the population aged 15 and older (+236,000; +0.8%) during the same period.


Bottom Line 

This Labour Force Survey was conducted in mid-March, after the February 24th start of the Ukrainian War. Since then, many commodity prices have surged, especially oil, gasoline, aluminum, wheat and fertilizer. This has boosted inflation worldwide, dampening consumer and business confidence and reducing family purchasing power. The Bank of Canada’s recent Business Outlook Survey shows that businesses expect inflation to continue for two years.

The newly released Bank of Canada Survey of Consumer Expectations shows record-high short-term inflation expectations. Despite more significant concerns about inflation today, longer-term expectations have remained stable and are below pre-pandemic levels. This suggests that long-term inflation expectations remain well-anchored, and those survey respondents believe the current rise in inflation will not last.

This view is predicated on the Bank of Canada tightening monetary policy significantly. All messaging from the Bank confirms that it will provide this by raising the overnight rate to around 3% over the next year and by quantitative tightening, reducing its holdings of Government of Canada bonds.

Anecdotal evidence suggests that housing markets have already responded to rising mortgage rates. Supply has increased, and multiple-bidding activity has weakened.

written by DLC Chief Economist Dr. Sherry Cooper