High inflation might seem like a global phenomenon these days, but that appears to be a media bias. The August Consumer Price Index (CPI) for G7 countries shows not all have elevated levels of inflation. Canada and the US are showing significantly higher headline inflation than their peers. Initially it was sold as transitory, but that narrative is falling apart these days. Unbiased organizations are even forecasting the risk is now to the upside for Canada and the US.
US Headline Inflation Is The Highest Across The G7
The US reported the highest annual growth for headline inflation across the G7. Annual CPI growth reached 5.1% in August, more than 85% higher than the G7 average. Americans haven’t seen annual growth rise at this clip for over 13 years.
G7 Headline Inflation
The annual growth of the consumer price index (CPI) for G7 advanced economies in August.
Source: National Statistics Agencies; Better Dwelling.
Canada Has The Second Highest Inflation In The G7
Canadian headline inflation is looking a little lofty for an advanced economy. Annual CPI growth hit 4.1% in August, about 43% higher than the G7 average. Canada hasn’t seen such large annual growth in the past 18 years. We know. You heard it was due to a base effect skewing the data. Canadian banks have taken a dive through the data and came to the conclusion that isn’t true.
Elevated Inflation Is NOT A Global Story, It’s A North American Issue
The elevated levels of headline inflation seen in Canada and the US aren’t typical. Germany is the next closest country in the group with annual CPI growth of 3.9% in August. From there it tapers lower into negative growth for Japan. While Germany is a little higher than usual, it’s much lower than Canada and the US. Just a few basis points at these levels is a big swing.
The OECD recently made upward revisions to its inflation forecasts for Canada and the US. Both countries are expected to see higher than expected inflation through next year. In fact, the rates of inflation are so high they’re typical of a developing economy, not an advanced one.
The inter-governmental organization also stated inflationary risks are to the upside. Canada and the US are both operating with limited trade due to health restrictions. As these economies reopen, they might see an increase in demand for goods. This can drive prices and inflation to even higher levels of growth.
The “Transitory” Inflation Narrative Is Falling Apart
Canada and the US are at two totally different points of recognizing the issue. Canada has so far stuck to the “transitory” narrative, attempting to dismiss it as an illusion. The US recently expressed concerns that high inflation might be stickier than previously thought. The first step to solving a problem is admitting it, and Canada isn’t at that stage yet.
The Bank of Canada might acknowledge elevated inflation at its October meeting. In the meantime, more and more high-profile analysts are criticizing the narrative. One major insurer has even said inflation will get out of control, and force Canada to raise rates. This might happen regardless of whether Canada can handle it at the time.
Both Canada and the US have depended on inflation-driving tools for their recovery. They’ve depended on low interest rates to induce demand, driving inflation higher. This isn’t an accident, but an intended goal stated by the Bank of Canada. The problem with this strategy is it’s hard to slow inflation when it’s a byproduct of your recovery plan.
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