Kevin Carmichael: The cost of just about everything that Statistics Canada measures was more expensive in September
The cost of just about everything that Statistics Canada measures was more expensive in September, pushing headline inflation to its highest in almost two decades and complicating the Bank of Canada’s plans to keep interest rates pinned near zero until well into 2022.
Statistics Canada’s consumer price index (CPI) increased 4.4 per cent from September 2020, the biggest year-over-year increase since the CPI surged to 4.7 per cent in February 2003. The index rose 0.2 per cent from August, matching the previous monthly increase, as all the categories that the agency uses to arrange its CPI basket posted gains, led by transportation, shelter and food.
Prices are being driven higher around the world by an extreme mismatch between supply and demand. Factories everywhere were idled in the early months of 2020 to slow the spread of COVID-19, and also in anticipation of a long recession. But unlike previous recessions, demand never really went away, because governments offset health lockdowns with unprecedented rescue packages. Suppliers are now scrambling to catch up, clogging ports and other transportation lanes that are dealing with their own pandemic-related issues.
Add a series of droughts in important food-growing regions and you are left with an epic supply shock that is filling the business pages with stories of shortages and companies that are raising prices as a result.
Central banks that set interest rates to keep inflation at a moderate pace have been forced to think hard about whether they can keep interest rates near zero for much longer. That includes the Bank of Canada. Governor Tiff Macklem would like to leave considerable stimulus in place because relatively high jobless rates indicate that the economy remains weaker than it was before the crisis.
“Slack in the labour market remains,” Macklem told reporters last week. “Low-wage workers are well below their pre-pandemic level, whereas other workers have recovered, so there still is some space there.”
Regardless, inflation has become a major distraction. The Bank of Canada, which this week began deliberating over its next policy adjustment, aims to keep the CPI advancing at an annualized pace of about two per cent, the midpoint of a comfort zone of one per cent to three per cent. That makes it hard to argue that inflation in excess of four per cent isn’t a serious threat, no matter how sound the logic that the supply-demand mismatch won’t last and prices will calm as soon as things get back to normal.
Jimmy Jean, chief economist at Desjardins Securities Inc., this week advanced his estimate of when the Bank of Canada will raise interest rates to July, from October. Bloomberg News reported that the price of financial assets tied to short-term borrowing costs implies that investors think Canada’s benchmark interest rate will move higher in the first part of 2022.
Those forecasts represent a challenge to the Bank of Canada, which has since last year insisted that it intends to leave its benchmark rate unchanged until at least the second half of 2022 to guarantee a “complete” recovery from the COVID-19 recession.
“Lift off may not come as early as markets are currently pricing, but the risks are certainly moving to sooner rather than later,” said James Marple, an economist at Toronto-Dominion Bank.
The average of three price gauges that policy-makers watch to get a sense of trend inflation was 2.7 per cent, compared with 2.6 per cent in August. The three measures attempt to smooth the headline number by removing energy and other volatile prices from the mix. After removing energy and food from the CPI basket, the index increased 3.3 per cent from September 2020, Statistics Canada said.
Milder core inflation could provide some comfort to central bankers.
Macklem and his deputies will release the results of their interest-rate discussions on Oct. 27. They will probably opt to further reduce their weekly purchases of Government of Canada bonds, an aggressive form of monetary policy that is no longer needed, as the economy is on track to post strong growth over the second half.
“The case for less BoC accomodation next Wednesday is overwhelming,” Phil Suttle, a former United States Federal Reserve and Wall Street economist who now runs his own consultancy in Washington, D.C., said in a note to clients.
But the Bank of Canada will likely need more evidence to back off its plan to keep the benchmark interest rate at 0.25 per cent until at least the second half of next year. Inflation is running alarmingly hot at the moment, but deflation was the bigger worry only a year ago.
Some academic economists argue that central banks have set artificial ceilings for economic growth over the years by moving too quickly to keep inflation below their targets. The CPI averaged year-over-year growth of 2.1 per cent from the start of 2018 to the end of 2019, and averaged 1.9 per cent between January 2018 and September.
Macklem has some room to manoeuvre, provided he can keep expectations from spiralling out of control over the next few months, since that could make inflation a self-fulfilling prophecy. The Bank of Canada’s latest quarterly survey of consumer expectations reported that respondents see inflation climbing to 3.7 per cent over the next 12 months, and then decelerating to about three per cent over the next two years.
“We do not see anything in the September CPI report that would convince the BoC that a more hawkish stance on policy would be warranted at the October meeting,” said Veronica Clark, an economist at Citigroup Global Markets Inc. “A few more months of inflation and labour market data have potential to raise concerns over persistently stronger inflation, but we expect the BoC would wait to see this data before shifting policy.”
Source: Financial Post