Canada inflation hits 8.1% but shows signs of softening

REAL ECONOMY BLOG | July 20, 2022

Authored by RSM Canada

Inflation reached 8.1% in June in Canada, the highest since January 1983, although the pace of the increase eased compared to previous months, according to data released by Statistics Canada on Wednesday.

On a monthly basis, the consumer price index rose by 0.7% in June, down from 1.4% in May.

More important, measures of core inflation have also risen at a slower pace: with CPI-common at 4.6% in June compared to 4.5% in May on a year-over-year basis, CPI-median steady at 4.9%, and CPI-mean at 5.5%, down slightly from 5.4%. These measures, though, remain much higher than the Bank of Canada’s 2% inflation target.

This means that after the Bank of Canada’s recent outsized 100 basis-point rate increase, there is a possibility that the bank will consider a more moderate hike of 75 basis points in September. This decision will depend on the rate of inflation in both goods and services in the next couple of months.

Signs of a plateau

There are signs that inflation could soon plateau. Canadians could see some relief from the key major expense categories: housing, food and transportation.

The impact of the Bank of Canada’s rate decisions is seen most notably in the cooling housing market.

Shelter prices for both renters and homeowners are also increasing at a slower pace compared to May. Yet rental prices in major cities like Toronto and Vancouver are rising by double digits, boosted by would-be home buyers who are scared off by high prices.

Additionally, with relaxed COVID-19 restrictions, the resumption of in-person events and immigration, people have been flocking back to major cities, sending demand and rental prices soaring.

Food inflation remained steady at 8.8%, but part of that leveling off can be attributed to the fact that Canada consumes more domestically grown food in the summer, which helps keep costs down.

As oil has dropped from its peak, gasoline prices are now below $2 a liter across most of the country, but this decline will not show up until next month’s data.

At the same time, travel demand shows no sign of slowing despite high airfares and hotel prices and chaos at airports because of the worker shortage. There is still quite a bit of pent-up demand with Canadians eager to shake off the pandemic restrictions. For this reason, demand for travel seems rather inelastic to price increases.

The takeaway

Even though the pace of price increases has slowed since May and could further slow next month as oil prices slide, it would be premature to declare peak inflation.

There are too many uncertainties, most on the international stage, that are beyond the Bank of Canada’s control. The volatile geopolitical conditions, particularly the Russia-Ukraine war, global supply chain disruptions and the pandemic are still factors. An event in any of these categories could pose another shock in the system that further sends prices upward.