Canadian inflation continues to rocket higher as rate hikes occur at a snail’s pace. The Bank of Canada (BoC) policy rate still isn’t at the level seen at the start of 2020, but annual growth of the consumer price index (CPI) reached 7.7% in May, the highest level since 1983. However, BMO Capital Markets urges investors to consider whether the current level of inflation is actually cooling like in 1983. It may have more in common with its acceleration a decade earlier, resulting in the Great Inflation.
“The latest CPI blowout famously lifted Canada’s headline inflation rate to 7.7%, the highest since early 1983,” said Douglas Porter, BMO’s chief economist. “While that’s the typical comparison, inflation was on its way down (big-time) in 1983.”
He instead prefers to look at the last time inflation accelerated to these levels. That would be the Summer of 1973, when a hot economy and tight labor market pushed inflation to an uncomfortably high number. However, it didn’t stop there.
“Inflation then was launched into the stratosphere (i.e., double digits) by OPEC’s oil embargo late that year and by soaring grain prices. (Sound familiar?),” he said.
Core inflation, which strips out food & energy since no one needs those, came in lower than the headline inflation. Though it still remains elevated at 5.2%, more than double the desired target rate. Porter notes this is only the second time in the past 30 years where it’s shown annual growth above 3%.
He finds yet another parallel to the 70s. “Eerily, that too is very similar to the summer of 1973, when core CPI had picked up to 4.9% y/y. Do you suppose it boded poorly that the top grossing movie in 1973 was The Exorcist?”
It’s probably a fairly safe assumption that in the Summer of 1973, policymakers also felt they were close to peak inflation. No one saw it coming.