The records keep tumbling

Markets were, to use a favourite media term, braced for a bad number when Canada's February CPI data were released this morning. The actual outcome was even worse than expected: the year-on-year rise in headline CPI came in at 5.7 percent, up from 5.1 percent in January and easily topping the consensus expectation for a 5.5 percent rise. That's the biggest gain for any month since August 1991, when CPI rose 6.0 percent -- a figure that may well be surpassed soon. 

The details of the report reveal more unwanted records. Unsurprisingly, gasoline prices were a major contributor to the overall increase, rising 6.9 percent month-to-month and 32 percent from a year ago. Excluding gasoline, the rise in CPI for February was 4.7 percent, easily the highest reading since StatsCan began compiling this series in 1999. As that number implies, price pressures in the month were broad-based. Shelter costs rose 6.6 percent from a year ago, the fastest annual rate since 1983. Food prices rose 7.4 percent, a number that is merely the highest pace for this component since 2009 -- scant consolation!

The Bank of Canada's preferred measures of core inflation are also continuing their inexorable march higher. The average of the three measures rose to just shy of 3.5 percent in February from 3.3 percent in January. The worst-behaved of these slightly arcane measures, "CPI-trim", has now reached 4.5 percent. 

The near-term outlook is somewhat difficult to discern. A week ago, it looked like a safe bet that soaring gasoline prices would push headline CPI yet higher in March. However, the somewhat unexpected fall in world crude prices has quickly translated into lower prices at the pumps. Much will depend on exactly when StatsCan's survey data are recorded.  

Beyond that, however, there are good reasons to think that headline CPI will not go back below 5 percent any time soon.  The sheer breadth of the current inflation surge is one reason; another is the strong likelihood that global food prices will be pushed higher as the year progresses, even if the Russia-Ukraine conflict ends relatively soon. Lastly, the recent resurgence of the COVID pandemic in China may well portend further disruptions to global supply chains. 

Taking all of this together, it looks quite obvious that the Bank of Canada will keep raising rates by 25 basis points at every Governing Council meeting this year.  There are still analysts on Bay Street who expect seven such hikes by year-end. Things may not turn out to be that simple. The fact that such major components of everyday spending as shelter, food and gasoline are leading CPI higher means that consumer demand may very quickly get squeezed -- recall that average earnings are up only 3.1 percent from a year ago. 

Whisper it not, but that talk of multiple rate hikes is being heard at the same time as the dreaded term "stagflation" is once again being bruited about. The Bank, like its opposite numbers from DC to Frankfurt to London, will have to keep its wits about it.