The Stats Canada July release shows the CPI surged to a 3.7% year-over-year pace, a new high in the last 2 decades and the 4th consecutive month with inflation about the 1 to 3% target band of the Bank of Canada. While it is indisputable that Canada’s deficit spending during the pandemic was significant, this is also true for nearly every country in the world.
Central bankers believe that the spike is only temporary, due to economic reopening shock after the pandemic. Lumber prices, for example, spiked when demand for new homes surged and have since normalized (see chart below). Many Canadians still remain out of work and the new variant proves that recovery is still uncertain. The latest forecast shows inflation creeping up to 3.9% in Q3, but once again we are warned to not overreact to this “temporary spike”.
Gasoline year over year price increased 30.9% in July, less than the 32.0% in June. Due to the oil production by OPEC+ remaining below pre-pandemic levels, gasoline prices increased 3.5% month over month.
Rising costs of homeownership, as well as shelter prices, are one of the major causes of the elevated inflation rate. The homeowners' replacement cost index, which is related to the price of new homes, reached a 13.8% year-over-year increase in July, an all-time high since October 1987. Similarly, the other owned accommodation expenses index, which includes commission fees on the sale of real estate, was up 13.4% year over year in July.
Although the inflation rate has been standing above the target band in the past months, the Bank of Canada still views inflation as a transitory phenomenon. They do not expect to start increasing interest rates till the labor markets have returned to pre-pandemic levels, which they judge to be in the second half of 2022.
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