Inflation surges at fastest pace in two decades in a hot streak that complicates recovery

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Consumer prices surged to the fastest pace of growth in two decades in August, adding to the complexity the Bank of Canada will face in steering the economic recovery.

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The consumer price index (CPI) rose 4.1 per cent from August 2020, the biggest increase since the spring of 2003, continuing a hot streak that has barely relented since the start of the year, Statistics Canada reported on Sept. 15.

While the Bank of Canada anticipates sustained, elevated levels of inflation, the current rally, if it persists, could make it difficult for policy-makers to bring inflation back to its target of two per cent over the long-term. The official inflation number burst out of the Bank of Canada’s comfort zone of one per cent to three per cent in April and has remained elevated ever since. The August numbers show that inflation is increasingly being stoked by supply constraints, and less from year-over-year comparisons with the worst months of the recession when the bigger threat was deflation.

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Political leaders could also jump on August’s figures, as affordability has taken centre stage in the run-up to the election next week. Prices rose for seven of the eight major basket components of the CPI, including homeowners’ replacement cost, which jumped 14.3 per cent, the most since 1987. Reports from the campaign suggest that voters have grown especially frustrated with housing costs.

Forecasters expected price pressures to push the index up 3.9 per cent in August, the median estimate of a survey of Bay Street analysts by Bloomberg News. “The Bank of Canada will pay attention to inflation pressures and continue to message the gradual withdrawal of monetary support over the next year,” James Marple, an economist at Toronto-Dominion Bank, said in a note to his clients.

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Throughout the pandemic, durable goods, which include items such as furniture, appliances and and vehicles, have contributed majorly to growing inflation. Last month, that portion of the CPI basket rose 5.7 per cent, an increase over the five per cent in July, with vehicles and furniture experiencing the most price pressures.

As well, gasoline prices surged by 32.5 per cent, mainly due to lower production levels from oil-producing countries.

The relaxation of COVID-19 restrictions stoked resurgent demand for services this summer. Such costs rose for a fifth consecutive month in August, led by hotel rates, which increased 19.3 per cent from August 2020.

To be sure, the Bank of Canada has been bracing for four-per-cent inflation. The July Monetary Policy Report, a quarterly release that outlines the central bank’s economic outlook, predicted the CPI would average annual increases of 3.9 per cent over the third quarter, which ends in September. The CPI rose 3.7 per cent in July.

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Governor Tiff Macklem has said repeatedly that he wants to see a “complete” economic recovery before he hikes interest rates, which means such factors as the labour market recuperating all lost jobs plus the ones that should have been created this year had there not been a pandemic. The latest job data show employers need to add an additional 156,000 positions to get employment back where it was in February 2020.

Therefore, although uncomfortably high, August’s inflation data probably isn’t enough to force the Bank of Canada to raise interest rates ahead of its current schedule of sometime in the second half of next year.

“We maintained our policy rate at its effective lower bound of 25 basis points, and we remain committed to holding it there until economic slack is absorbed so that the two per cent inflation target is sustainably achieved,” Macklem said following the September interest rate decision.

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