What economists say about soaring inflation and the Bank of Canada

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Canada experienced its fastest inflation acceleration since January 1983 in May, all but ensuring an aggressive interest rate hike from the Bank of Canada at its July meeting to clamp down on price growth.

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The consumer price index, which measures inflation, shot up nearly a percentage point to 7.7 per cent on an annual basis in May from April. Month over month, prices climbed 1.4 per cent from April to May.

Energy prices contributed significantly to the gains. If gas prices are excluded from the headline number, inflation would be 6.3 per cent. Still, prices are increasing across the core baskets that Statistics Canada tracks.

With few signs of inflation slowing down soon, all the economists quoted below expect the central bank to raise interest rates by 75 basis points next month. The bank is already moving faster than predicted, with its benchmark rate currently at 1.5 per cent after 50-basis-point hikes in April and June. Read on for what economists are saying about the latest inflation print and where the Bank of Canada goes from here.

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Douglas Porter, chief economist at Bank of Montreal:

“We have a problem… Another month, yet another high-side surprise on inflation. While energy will shoulder much of the blame for the latest spike, it’s important to note that many measures of core inflation are now at or near 5 per cent, so this is well beyond a one-off move that will quickly fade even if oil prices relent… The key takeaway is that the Bank of Canada still has lots of work to do, with a 75 bp hike in July almost fully baked in, and we suspect another 100 bps of tightening to follow that through the remainder of the year. Just like the consensus on inflation, the risks to that view seem tilted to the high side.”

Andrew Grantham, senior economist at Canadian Imperial Bank of Commerce:

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“With little respite from high gasoline prices on average in June, and with food prices likely to continue to increase, headline inflation should easily surpass eight per cent next month. However, with commodity prices starting to trend lower amid concerns of a global slowdown, inflation should finally moderate in late summer and into the fall. Headline CPI was already running well above the Bank of Canada’s April projections prior to today, and so this release makes a 75 bp move at the next meeting a near certainty and suggests that the peak in interest rates could be higher than the 2.75 per cent we had previously predicted.”

Royce Mendes, managing director and head of macro strategy at Desjardins:

“Statistics Canada really should add a warning label to these scorching hot inflation prints… Ultimately, the Bank of Canada needs to get a handle on prices soon… Monetary policy works with long and variable lags. The Bank of Canada’s policy rate will no longer be so glaringly stimulative and out of touch with inflation and the housing market will likely feel the pinch of higher rates even more than it already has. As a result, we see more measured steps to tighten policy this fall.”

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Leslie Preston, managing director at Toronto-Dominion Bank:

“A generation of Canadians is experiencing high inflation for the first time. If you aren’t over 40, you have never lived through inflation like this, and unfortunately, we are not expecting much of a reprieve going forward. Inflation is expected to remain elevated through 2022 …. On the shelter side, we are likely to see a continuation of rent price increases alongside rising mortgage interest costs. This will be balanced against the impact of declining house prices.”

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Claire Fan at Royal Bank of Canada:

“Needless to say, inflation pressures continue to broaden out. By our count, over 60 per cent of the CPI basket was seeing price growth at a faster rate than the three per cent top range of the Bank of Canada’s inflation target versus pre-pandemic (three-year ago levels) in May. The share was less than half of that in 2019. There have been early signs of easing supply chain constraints, as ocean transport time narrows and container shipping costs have ticked lower in recent months. Central banks globally have been, and are expected to continue to, rein in monetary support faster to tame overheating consumer demand and ease inflation momentum.”

Charles St-Arnaud, chief economist at Alberta Central:

“With inflation well above its target of two per cent and more persistent than initially thought, inflation expectations rising and a broadening of inflationary pressures, we believe the Bank of Canada will continue to aggressively hike interest rates. Moreover, the sharp acceleration means that the BoC will continue to front-load the rate increase. In our view, the BoC will likely increase its policy rate by 75 bp at the July meetings and by 50 bp at the September and October meetings, ending the year at 3.25 per cent.”

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