Canadian inflation hits 7.7%, largest increase since 1983

A fuel pump is seen in a car at a gas station in Toronto April 22, 2014. Gas prices have been climbing to the $1.40 Canadian dollars ($1.25) per litre, which would be the highest fuel price in over three years in the Toronto area. REUTERS/Mark Blinch (CANADA - Tags: ENERGY BUSINESS)Canadian inflation soared 7.7 per cent in May, largely driven by rising gas prices. (Reuters/Mark Blinch)

Statistics Canada says inflation jumped 7.7 percent in May, marking the biggest year-over-year increase since January 1983 and putting pressure on the Bank of Canada to rapidly hike rates.

The increase in the Consumer Price Index (CPI) was driven by soaring gas prices, which rose 12 percent compared to April. Statistics Canada also said that a 5.2 percent annual price increase for services, which includes hotels and restaurants, contributed to the upward pressure.

All eight major components of the index saw increases in the month of May, with food and shelter prices rising at the same rate as in April, up 8.8 percent and 7.4 percent respectively. The remaining components, with the exception of alcohol, tobacco, and cannabis products, saw prices increase at a faster rate than last month.

“Price pressures continued to be broad-based, pinching the pocketbooks of Canadians and in some cases affecting their ability to meet day-to-day expenses,” Statistics Canada said in a release.

Economists had widely predicted inflation to be higher than April when inflation hit 6.8 percent, but May’s rapid acceleration still surpassed expectations. Analysts had predicted an increase of 7.4 percent.

Canadians paid 48 percent more for gas in May compared to last year, while energy prices overall jumped 34.8 percent.

Grocery prices remained high in May, matching April’s increase of 9.7 percent, which was the largest increase in the category since Sept. 1981. The price of fresh vegetables was up 10.3 percent, meat was up 9 percent, and edible fats and oils surged 30 percent, the largest increase on record.

Prices for traveler accommodations have also been on the rise, increasing 40.2 percent overall from the year before, with the biggest increases seen in Ontario (56.8 percent), British Columbia (43.2 percent), and Nova Scotia (41.8 percent). Restaurant prices also jumped 6.8 percent in May.

‘Bank of Canada will hike by 75 basis points’

Inflation has been on a tear in Canada, putting pressure on the Bank of Canada to raise rates rapidly, cool demand, and bring inflation back to its target range of between one and three percent.

Calls to follow the Federal Reserve’s footsteps and hike its benchmark interest rate by 75 basis points when it issues its next decision in July has grown in light of the recent inflation data.

TD Economics managing director Leslie Preston wrote in a research note on Wednesday that “we are not expecting much of a reprieve going forward” when it comes to inflation.

“Inflation is expected to remain elevated through 2022,” Preston said.

“All of this reinforces the view that the Bank of Canada will hike by 75 basis points on July 13, following in the Fed’s footsteps.”

BMO Capital Markets chief economist Douglas Porter said in a research note on Wednesday that given gas prices have continued to rise this month, the inflation print could hit the 8 percent threshold for June.

“The key takeaway is that the Bank of Canada still has lots of work to do, with a 75 basis point hike in July almost fully baked in, and we suspect another 100 basis point of tightening to follow that through the remainder of the year,” Porter said.

“Just like the consensus on inflation, the risks to that view seem tilted to the high side.”

The Bank of Canada raised its benchmark rate by 50 basis points on June 1, the second consecutive outsized hike that brought the policy interest rate to 1.5 percent.


Source: Yahoo Finance, by Alicja Siekierska

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