Price pressures in Canada

As in the United States, so also in Canada. Last week the BLS reported that US headline CPI jumped 4.2 percent year-on-year in April.  It blamed much of the increase on the "base effect" created by the fall in prices at the start of the COVID pandemic a year ago.  This morning Statistics Canada reported that Canada's headline CPI rose 3.4 percent year-on-year in April, up from 2.2 percent in March. It too blamed the base effect for much of the increase, but as in the US, there is more to the story than that, and it may soon have implications for monetary policy.  Every sub-component of the index was higher on an annual basis, suggesting the possible emergence of broad-based price pressures. 

The unexpectedly large increase in headline CPI on a year-on-year basis was heavily influenced by gasoline prices, which rose a startling 62.5 percent, the largest increase ever measured by StatsCan. This was partly a base effect, as gasoline usage (and hence prices) fell sharply at the start of the pandemic. It also reflected the introduction of higher carbon pricing by the Federal government over the course of the year, with the most recent increase coming at the start of April.  Excluding gasoline, the yearly rise on CPI was 1.9 percent, while the core index (excluding food and energy) rose 1.8 percent.

The lower increase in these special aggregates should be of only limited comfort to policymakers, because the data for the month of April itself have some worrying elements.  The month-to-month increase in headline CPI for April was 0.5 percent (unadjusted) or 0.6 percent (seasonally adjusted). These monthly figures annualize to a rate of 6-7 percent, well above the Bank of Canada's 2 percent central target. In addition, all three of the Bank of Canada's preferred measures of inflation rose in the month, with two of the three now standing at 2.3 percent year-on-year. 

Like the Federal Reserve, the Bank of Canada has explicitly stated that it will "look through" any temporary spike in inflation, such as that created by the base effects. Both institutions have said they will allow inflation to move above target temporarily as they endeavour to support the economic recovery from the COVID pandemic. At the same time, both wish to keep inflation expectations well-anchored at 2 percent. The base effects will fall out of the year-on-year calculation in both countries in May, but the key factor to look at when the next CPI data appear will be the monthly increase rather than the yearly change. In the case of Canada, a monthly rise anywhere close to the April figure will certainly boost expectations that rates will start to rise sooner than the Bank of Canada has been signalling.