Canadian inflation is rising at the fastest pace in decades, but at least it’s just transitory… maybe. Statistics Canada (Stat Can) latest consumer price index (CPI) numbers show a big jump in prices for April. The sentiment shared between the Bank of Canada (BoC) and Stat Can is, this is just temporary. However, much of Bay Street doesn’t entirely agree with that narrative. Here are the numbers, and what finance experts had to say this morning.
Canadian Consumer Prices Are Up 3.4% From Last Year
Canada’s CPI made a sharp increase, which the central bank and Stat Can attribute to a base effect. CPI increased 0.6% in April, compared to the month before on a seasonally adjusted basis. Unadjusted, annual growth reached 3.4% for the month, up sharply from the 2.2% seen in March. Base effect played a role, but not as much as it’s being talked up, according to many economists.
Canadian Consumer Price Index (CPI)The annual percent change for CPI, including and excluding energy costs. Source: StatCan; Better Dwelling.
First, let’s talk about the base effect. This is when a period is compared to a previous one that was artificially impacted. Annual growth may be normal in the recent period, but low growth in the previous one can make the difference seem exaggerated. In reality, growth can be fairly normal, it just appears to be accelerating.
In this case, we’re comparing last month to a period with a huge one-time event. In April 2020, it was the first full month of the pandemic, complete with lockdowns. This led to a supply shock and vendors had to discount inventory quickly to keep it moving.
Consequently, the period didn’t reflect a rational market, but a one-time event. As the pandemic went on, prices adjusted to more rational levels, once supply was able to adjust. How much of the current growth is attributed to base effect appears to be up for debate though.
Homeowner Replacement Costs See Biggest Jump Since 1989
One area of interest to most of you is the shelter sub-index, which you can feel moving. Shelter prices are up 3.2% in April, compared to the year before. The annual growth in the previous month was 2.4%. It is affected by some base effect, but clearly, some of this growth isn’t just a data skew.
One of the biggest drivers of shelter was homeowner replacement costs. This is how much it would cost to replace parts (or all) of a home, and is based on new home prices. This area grew 9.1% in April, compared to a year before. It was the biggest rise since April 1989, and driven primarily by rising material costs.
I know. You’re thinking, “that’s it?!” Even with some multi-year highs, the increase for shelter might seem low to some. That’s because the impact is weighted to balance how various groups of people feel it. If you already own a home and your mortgage is up for renewal, all you feel is lower payments. If you don’t own a home and are buying a new one, you just saw the price shoot up. At least one economist has forecast the growth will trickle in later.
BMO Expects The BoC To Ignore These Numbers Until June
BMO macro strategist Benjamin Reitzes sees inflation numbers as largely a base effect. However, he did place emphasis on the size of recent growth, indicating it’s not entirely base effect. His calculations show the past two months experienced the fastest growth in over a half century. The bank sees some of the impact fading by June, at which point we’ll see how much is transitory.
“Headline inflation has surged 2.3 percentage points over the past two months (the fastest two-month acceleration since the early 1950s) amid a combination of rising commodity prices and a sharp decline in prices a year ago (i.e. base effects). Note that the base effects will reverse in a couple of months, as June 2020 saw prices rebound, with the biggest monthly gain in 3.5 years,” he said.
Adding, “Expect the BoC to take these figures in stride and see what the next few months bring before reacting as there’s plenty of noise in inflation figures these days. Even so, this report will only turn the volume higher on rising inflation fears.”
Earlier this month, BMO’s chief economist said if you’re not worried about inflation, you’re not paying attention.
National Bank Thinks High Inflation Isn’t Just A Temporary Blip
National Bank of Canada (NBC) economists have been vocal about persistent inflation. Economists Kyle Dahms & Matthieu Arseneau said, “our in-house replications of the core measures ‘once’ preferred by the Bank of Canada were also showing stout momentum, with the CPI-Median rising 0.36% m/m (+2.9% annualized over the past 3 months and the strongest monthly print since January 1991) and CPI-Trim increasing 0.27% m/m (2.7% annualized over the past 3 months).”
Arseneau recently pulled up the Bank of Canada (BoC) research on inflation, and disagreed with their position. Reconstructing the CPI components, he concluded this isn’t just a base effect. Most of the growth acceleration is recent, and has little impact on the annual comparison. The economist failed to find data supporting the BoC’s statement and challenged them to show their work.
On that note, it wasn’t a surprise that this morning he reiterated inflation will be persistent. “Considering the strong annual prints released this morning we believe there could be persistence in pressures rather than a transitory effect,” he said.
The economists also further explained the reopening of the economy will happen soon. This will unleash pent-up savings, driving costs even higher.
RBC Sees Higher Input Costs Driving Consumer Prices Higher
RBC economists Claire Fan and Nathan Janzen let the data do most of the talking. The bank sees inflation pressures as high, but still able to be managed at this point. They did share a chart indicating higher input costs will lead to higher price growth. This is expected to help drive inflation expectations and possibly yields to follow.
Desjardins Sees Inflation Risk To The Upside
Desjardins’ senior economist Benoit Durocher also wasn’t convinced this is transitory. Most of the base effect is being attributed to gasoline prices, which plummeted last year. “The rise in inflation noted over the last few months is not solely the result of gasoline price fluctuations,” he said.
The economist instead highlights over two-thirds (70.3%) of CPI components recorded annual increases higher than 3 months ago. This was the highest rate seen in over 10 years, which he sees as demand related.
“Without a doubt, the upward pressure on prices reflects the imbalances that currently exist between supply and demand for some goods and services.” he said.
“Even if the annual inflation rate were to gradually fall in the coming months as the effects linked to gasoline vaporize, the risk remains to the upside because of the pressure caused by the many imbalances. It remains to be seen if the imbalances will fade in the next few months as the lockdown is gradually lifted.”
The BoC and Stat Can may be convinced inflation is just a temporary issue, but that doesn’t appear to be the general consensus in the private sector.
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