Could have been worse, and likely soon will be

Canada's headline CPI rose 6.8 percent year-on-year in April, up from the 6.7 percent rise recorded in March, according to data published today by Statistics Canada. This is the highest rate seen in more than three decades.  The news might have been worse -- just look at the UK, where the ONS today reported a 9 percent CPI increase for April -- but there is every likelihood that CPI will continue to set new highs in the next few months. 

Food, energy and shelter costs continue to be the biggest contributors to the rise in inflation, even though gasoline prices edged lower in April after a double-digit surge in March. Food costs rose 0.9 percent month-to-month in April, led by prices for food purchased from stores, while shelter costs rose 1.1 percent. Even with the slight fall in gasoline prices, transportation costs rose 0.5 percent in the month. In all, the monthly rise in CPI was 0.6 percent, down from the gasoline-driven 1.4 percent recorded in March. This sounds encouraging until you stop to consider that 0.6 percent annualizes to a rate well above the current year-on-year figure. 

Most of the special aggregates reported by StatsCan show lower year-on-year increases than headline CPI: ex food, up 6.4 percent; ex energy, up 5.4 percent; and ex food and energy, up 4.6 percent. Once again, however, a glance at the month-on-month increases tells a less encouraging story. Each of these aggregates posted a 0.6 percent rise in April, which indicates that inflation pressures are broad-based and are showing no sign of moderating.

And then there are the Bank of Canada's preferred inflation measures. All three of these have been edging steadily higher for many months, and that trend continued in April. The average of the three measures rose by 0.3 percent to just above 4.2 percent in the month.

There is nothing in this report to dissuade the Bank of Canada from continuing its aggressive tightening actions. It is already possible to predict that the May CPI will be another horror show.  The performance of the core inflation indices shows that price pressures are broad-based,  while gasoline prices across the country have hit new all-time highs this week -- and this is the week in which StatsCan collects the data for its May CPI release.  The inflation surge is clearly top-of-mind with the Canadian public, judging by media coverage. It is hard to see inflation expectations remaining contained if the Bank of Canada does not continue to talk -- and act -- tough.