Canada’s consumer price index touched its highest level in almost two decades last month, as the price of just about everything is up sharply compared to the lows of a year ago.
Statistics Canada reported Wednesday that the inflation rate hit 4.1 per cent in August, the highest level since 2003. That’s up from 3.7 per cent in July, which was already the highest rate in a decade.
Just about every type of good or service was a lot more expensive in August than it was a year earlier, including shelter (up 4.8 per cent), transportation (8.7 per cent) and food (2.7 per cent).
The homeowners’ replacement cost index, which is related to the price of new homes, rose by 14 per cent in the year up to August. That’s the sharpest jump in that metric since 1987.
Some of the biggest contributors to the jump were the sectors that Bank of Montreal economist Doug Porter noted were in full-on “reopening” mode from COVID-19 shutdowns including air travel, where the price of tickets soared 37.5 per cent and hotel charges increased by 12 per cent. Gasoline prices, meanwhile, were up by 32 per cent compared to last year.
Filling up his pickup truck in Victoria on Tuesday, motorist Ben Wood says higher pump prices are having a significant impact on his cost of living.
“I’m keeping my tank not as full as I would like to, and trying [not] to drive my car when I can, but it definitely adds a lot to the cost of living,” he told the CBC while filling up at $1.56 a litre for regular gas, not the more expensive premium blend he might typically go for.
“Compared to the 90, 95 cents that we were at a year or two ago, it’s a big hit to the wallet, for sure.”
Supply chain issues causing shortages and driving up consumer prices of what’s available are a big factor in many sectors of the economy, and there’s perhaps no better example of that than in cars.
The price of new cars has risen by 7.2 per cent in the past year, which is the fastest pace since 1994, Porter noted. An ongoing shortage of semiconductor microchips is limiting how many cars the car companies can crank out, which is pushing up prices for what’s available. The shortage of cars is pushing up prices for the used ones too, and leaving dealer lots mostly empty.
What is ‘transitory’ inflation, anyway?
Other parts of the spiking inflation rate are because COVID-19 created artificially low prices a year ago, which makes annual comparisons now look misleadingly large. That type of inflation is what economists like Porter describe as being “transitory” and the good news is that Porter says those year-ago comparisons should run out of steam soon.
But the August numbers do suggest that the cost of living is fundamentally going up at a rapid clip.
“Some of the meaty rise was driven by reopening pressures, some by base effects … and some by — presumably temporary — supply chain issues,” Porter said.
But “rising wage pressures, robust home prices and firm energy costs all suggest that inflation is not about to quickly roll over as these other short-term factors fade,” he added.
Economist Royce Mendes at CIBC has a similar view, saying in a note to clients that he thinks August’s record-high inflation “might represent the summit of the mountain.”
In the early days of the pandemic, Canada’s inflation rate actually dipped below zero for a while, in May and June of 2020. But if that artificial plunge didn’t happen, the spike today wouldn’t look quite so dramatic, Mendes says.
“Much of the increases over the past year are just making up for weakness early in the pandemic,” Mendes said. “With the latest readings still suggesting that much of the recent acceleration is transitory and due to base effects, supply chain shortages and surging reopening demand, central bankers will stick to the script of keeping rates on hold until late next year.”
Food and drink, too
Others, however, are not quite as convinced that the eye-popping inflation is something that can be dismissed as artificial and nothing to worry about.
The price of used cars has skyrocketed, Scotiabank economist Derek Holt said, but Statistics Canada doesn’t even track those numbers in its inflation figure. And Canadians are well aware that the price of a home is going up, but so is renting. And the cost of things like alcohol, tobacco and recreational cannabis are on the rise — as is food.
On a restaurant patio in downtown Toronto, diner Julie Eng is keenly aware of how much more it costs to go out and get a bite to eat after the better part of a year not being able to.
“Going out is more expensive, I’ve been used to eating at home, but now grocery bills are going up higher and higher,” she told CBC News in an interview. “I’ve been at home eating and buying groceries from the market is more expensive and everything is going up.”
Canada’s seasonally adjusted annualized inflation rate has only been below the Bank of Canada’s target of two per cent for five of the 18 months since the pandemic began, Holt said, so it’s getting harder to believe that higher costs for just about everything are temporary blips.
“The Bank of Canada has spent far too much time dismissing inflation as base effect driven and transitory after having drastically underestimated inflation in its forecasts over the past year despite knowing the base effect starting points,” he said.
While Holt says it’s true that the pandemic depressed prices for a while, that was for the most part well over a year ago.
“Some of this may be transitory and some is reflecting resilience and longer-lived drivers that we can debate. You cannot, however, toss aside this chart as base effect driven since by design it isn’t comparing to prices of a year ago,” he said.