Kevin Carmichael: Latest numbers support Bank’s case that more rate hikes are needed
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Statistics Canada’s consumer price index, the country’s main inflation gauge, increased 6.9 per cent in September from a year earlier, compared with seven per cent the previous month, suggesting inflationary pressures are receding, albeit slowly. Here’s what you need to know:
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Headlines
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Year-over-year increases in the consumer price index have now dropped for three consecutive months, although inflation still appears to be spreading to more corners of the economy.
Lower gasoline prices explain most of the decline; they only rose 13.2 per cent from September 2021, compared with an annual increase of 22.1 per cent in August.
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Food purchased from stores surged 11.4 per cent, the most since August 1981, led by higher prices for baked goods, fresh vegetables and meat, Statistics Canada said. The agency attributed the increase to poor weather, higher fertilizer and natural gas prices, and “geopolitical instability” resulting from Russia’s invasion of Ukraine.
Excluding food and energy, inflation rose 5.4 per cent from a year earlier, compared with 5.3 per cent the previous month, suggesting the initial shock from surging commodity prices and pandemic-era supply bottlenecks is rippling through the broader economy. Passenger vehicle prices were 8.4-per-cent higher, and furniture cost 13.3 per cent more than in September 2021.
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Context
The Bank of Canada aims to keep year-over-year increases in the consumer price index contained within a zone of one per cent to three per cent by targeting the midpoint, or two per cent.
Inflation broke out of that range in April 2021 and never looked back. Annual increases peaked at 8.1 per cent in June, the biggest in four decades, as gasoline prices, diminished stores of food staples, global supply disruptions, overheated housing markets and a surge in demand after the pandemic combined to create a perfect storm of inflationary pressures.
It’s a global phenomenon that is more acute in some places than in Canada. The U.K. reported Oct. 10 that its consumer price index rose 10.1 per cent in September from a year earlier.
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One shift worth noting: mortgage costs are now putting upward pressure on overall inflation because of higher interest rates. Between October 2020 and June 2022, the cost of borrowing money to buy a home was disinflationary. Now, the costs are rising on a year-over-year basis, jumping 8.3 per cent from September 2021. Upward pressure on other prices associated with housing are easing as markets cool, but they still are positive. Homeowners’ replacement cost, a proxy for real-estate prices, increased an annualized 7.7 per cent compared with 8.4 per cent in August.
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Bottom line
Evidence that inflationary pressures are easing is positive. However, prices are still rising faster than wages, so households will continue to feel squeezed, and politicians and policymakers will continue to feel pressure to do something about it.
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Also, the fact that inflation continues to spread across the economy probably offsets the slowing of the headline rate. Charles St-Arnaud, the chief economist at Alberta Central, observed that almost 80 per cent of the items in Statistics Canada’s price basket increased by more than three per cent year over year, and more than 60 per cent increased by more than five per cent.
The Bank of Canada’s leaders have been clear that they aren’t finished raising interest rates to douse “excess demand.” The latest inflation reading will reinforce their resolve.
Correction: A previous version of this story incorrectly stated that food costs increased 11.1 per cent from September 2021. The article has been updated to state that food purchased in stores rose 11.4 per cent from September 2021.
• Email: kcarmichael@postmedia.com | Twitter: carmichaelkevin