Publication date: Sep 20, 2022 • 1 hour ago • 4 min read • 82 comments The price of groceries rose 10.8 percent from a year earlier, the fastest pace since 1981. Photo by James Park / Postmedia
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Canada’s headline inflation fell for a second month in a row in August, to an annual rate of 7.0%, below economists’ expectations of 7.3% and the lowest since July at 7.6%.
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The slowdown in the consumer price index was the largest since the start of the COVID-19 pandemic, Statistics Canada said Tuesday.
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All three key inflation indicators, which are closely watched by the Bank of Canada, eased slightly but remain well short of the central bank’s 2 percent target. In a speech later that day, Bank of Canada Deputy Governor Paul Beaudry acknowledged that while trends were moving in the right direction, the pace of price increases was still too high. He added that since the central bank started inflation targeting in 1991, the Bank has been largely successful in keeping inflation around its 2% target. “Today, that record is being severely tested as we emerge from the first global pandemic in a century and deal with the fallout from Russia’s unprovoked invasion of Ukraine,” Beaudry said in a Sept. 20 speech before the University of Waterloo’s Faculty of Arts , adding that both factors have led to an increase in inflation.
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“Monetary policy is actively tightening to cool the economy and contain these pressures,” he further noted. The slowdown seen on Tuesday was largely driven by lower gasoline prices, which fell 9.6 percent from the previous month, the biggest monthly decline since April 2020. Gasoline prices fell the most in Saskatchewan and Alberta. The price of gasoline, however, remains 22.1% higher than last year. Excluding gasoline, inflation rose 6.3 percent year-on-year, from a 6.6 percent increase in July. Travel and accommodation expenses also increased at a slower pace. The price of groceries, however, rose 10.8 percent from a year earlier, the fastest pace since 1981, due to extreme weather, higher input costs and disruption to supply chains caused by Russia’s invasion of Ukraine.
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Meat prices rose by 6.5 percent from last year, dairy by 7 percent, baked goods by 15.4 percent and fresh fruit by 13.2 percent. Beaudry raised two concerns about Canadians’ inflation expectations: the “accommodative” expectation where Canadians see high inflation and expect it to rise further, regardless of what the Bank may announce; and what he called a “rational” response where Canadians assume that the effects of monetary policy will bring inflation back to target over the long term. The truth, Beaudry said, lies somewhere in between those theories. “At some level, you don’t need an economist to tell you this: Nobody naively assumes that just because inflation is high today, it’s going to stay there,” Beaudry said. “Instead, people try to understand the economic environment and form expectations based on that understanding.”
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“However, this environment is complex, so the mental gymnastics associated with fully reasonable expectations seems understandably foreign,” Beaudry added. Bank of Canada Governor Tiff Macklem attends a press conference in Ottawa. File photo by Blair Gable/Reuters In outlining those theories, Beaudry raised the issue of credibility, which Bank of Canada Governor Tiff Macklem acknowledged is being tested as the Bank aims to bring inflation back to balance in July. In closing, Beaudry reiterated that the Bank would do whatever was necessary to bring inflation to 2% and maintain Canadians’ confidence in the central bank. “Even after today’s slowdown, the annual rate of inflation remains well above the Bank of Canada’s target and therefore further rate hikes remain on the horizon,” Andrew Grantham, senior economist at CIBC Capital Markets, wrote in a note after the figures. .
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“However, a sharper gap appears to be opening between Canadian and US inflation trends, which should bring a lower top from the Bank of Canada than the US Federal Reserve.” Leading up to inflation data released on Tuesday, economists believed price pressures in Canada could ease faster than in the US. food and energy to fall at a faster rate. While the second monthly drop in inflation readings may make policymakers rest a little easier, Royce Mendes, managing director and head of macro strategy at Desjardins, wondered in his post-data note whether the data was “too good to pass.” they are real.”
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“We’ve seen falsifications in the numbers before, with the recent US inflation data a prime example,” Mendes said in a Sept. 20 note. “However, it could be true that easing supply chain pressures, falling commodity prices and a highly interest rate-sensitive economy are conspiring to see prices rise in Canada relative to other jurisdictions.” Mendes added that Tuesday’s numbers reinforce Desjardins Financial Group’s position that the Bank of Canada has another 50 basis point hike up its sleeve. Overall, economists expect the central bank to be cautious and raise interest rates again on October 26. • Email: [email protected] | Twitter: StephHughes95
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