Canadian Inflation Will Be High Through Next Year, The Media Got Us Wrong: BMO

Canadians are seeing higher inflation and one of the country’s biggest banks thinks you might want to get used to it. BMO senior economist Douglas Porter wrote to capital markets customers to clarify a position in a national newspaper. The outlet had isolated his quote, and used it to downplay concerns about inflation. In reality, they see elevated inflation for at least two years. The second inflation wave is only starting to form. 

Canadian Inflation Forecast 50% Higher Than Target Next Year

The bank is forecasting headline CPI to be at the high end of the consensus numbers. A base effect is making numbers look artificially high. What most don’t get, is saying something is artificially high, does not mean it’s low in reality. In this case, Canada’s CPI is still high, just not as high as the base effect makes it look. 

The bank sees elevated inflation throughout next year. They’ve forecast an average of 3% for both this year and next. That’s about 50% higher than the ideal target rate. Canada hasn’t seen inflation since 1991, “let alone two years in succession.” 

The First Wave of Inflation Was A Squeeze. The Second Will Be Fundamentals Playing Out

Canada’s elevated inflation will play out in two stages, and the first one is the transitory boost. Due to the pandemic, some goods have seen a base effect, where the comparison period is off. These smooth their way out over time.

The second inflation wave will be driven by more fundamental economic factors. BMO sees 3 major pressures are just starting to form that will boost prices:

  1. Wage pressure is a big one with the increase in job vacancies. More competition between employers for labor means wages need to climb. As those wages climb, those costs are passed onto the consumer. 
  2. Home prices have been surging for some time now, but it takes time to work its way into government data. BMO estimates it takes between 12 and 18 months for the costs to show up in CPI. 
  3. Energy and food prices are on the rise as extreme weather becomes common. Porter is reminded of the early 1970s, when the inflation crisis was sparked by a shock to oil, and grain shortage. 

BMO Wants To Make It Clear, They Expect High Levels of Inflation

The bank isn’t expecting an early 80s style inflation crisis, but does expect high inflation. Many of the factors that would boost inflation are only just beginning to form. “… if you are looking for soothing words on inflation, probably best not to approach us—similar to the U.S., our calls are at the high end of consensus, with headline Canadian CPI to average roughly 3% this year and next,” said Porter. 

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