EconoFACTS

May 18, 2022 | 09:10

Canadian CPI: Who'll Stop the Rain?

Economist

Chief Economist and Managing Director
Economics

Douglas Porter has over 30 years of experience analyzing global economies and financial markets. As Chief Econom... (Read more)

Douglas Porter , CFA

Chief Economist and Managing Director
Economics

Douglas Porter has over 30 years of experience analyzing global economies and financial markets. As Chief Econom... (Read more)

Canadian consumer prices rose 0.6% in April, lifting the annual inflation rate a tick to 6.8% (from 6.7% in March). The uptick was in spite of a brief respite for gasoline prices in the month, as price pressures are clearly still broadening out. As a clear signal of that spread, all three major core metrics took a big step up to average 4.2% (from upwardly revised tallies the prior month, which now average 3.9%). Even the BoC's mildest version of core, the common component measure, is now running at a 3.2% clip, above the high end of the Bank's target zone.

The April rise was exactly in line with our call, albeit a tick above consensus. But, this is the relative calm before another downpour in next month's report, as gasoline prices are tracking a double-digit increase for May alone. In addition, StatCan will update the basket with new weights and introduce used vehicles next month, which are a wildcard. StatCan notes that had used vehicle prices been included last month, it would have added 0.2 ppts to headline inflation, and there's little reason to expect a big shift next time. At the very least, it looks like headline inflation is primed to pop above 7% in May. Putting that in perspective, as recently as last month's MPR, the BoC expected inflation to average 5.8% y/y in Q2.

While we have all become somewhat numb to outsized CPI readings, note that the 0.7% rise in seasonally adjusted terms would have ranked in the top 10 monthly rises in the past 30 years (aside from the wildness of the past year)—and, again, this is in a month that gas prices dipped! What caused the latest upswing in prices? The prior boom in home prices is now aggressively working its way into CPI, with new home prices and "other owned accommodation expenses" (mostly real estate fees) the two single biggest drivers last month. Restaurant meals were next, with both food and labour costs kicking in, driving them up at the fastest monthly rise in 30 years (+1.5%). Natural gas prices soared 6.3% m/m, filling in as gasoline prices took the month off. And, two separate components that had previously been a drag on inflation also stepped up to the plate—auto insurance rates jumped 1.8% and mortgage interest costs nudged up (the first monthly rise in two years).

Bottom Line: The key takeaway from April's CPI release is that inflation is spreading much more broadly, and at clear risk of getting firmly entrenched. The fact that headline inflation stepped up even a wee bit to yet another multi-decade high in a month when pump prices briefly relented and the base effects were helpful speaks volumes. Barring a deep dive in oil prices in coming weeks and months, we expect that the worst is yet to come on the headline readings, and that inflation north of 6% will still be with us by the end of this year.

Table 1 - Canada — CPI

(month/month % change)

Source: BMO Economics, Haver Analytics