INFLATION
WHAT YOU NEED TO KNOW ABOUT CHANGING CONSUMER PRICES IN CANADA • Canada’s Consumer Price Index rose by 4.4% in September 2021—the largest rate of inflation seen in Canada since 2003, and a second consecutive month with an inflation rate of greater than 4%. • The rate of inflation varied across Canada, with British Columbia experiencing a below-average 3.5% increase in prices. • Overall, the price level is now 4.0% higher than it was immediately before the pandemic; alternative scenarios indicate that the price level would only be up to 1.8% higher had there been no pandemic.
the rennie brief
21 OCTOBER 2021
At 4.4%, Canada’s annual inflation rate in September was at its highest level in almost 20 years, reflecting supply constraints, base-year effects, and increased consumer spending.
Actual & Estimated Inflation Trends CANADA
WHAT IS INFLATION AND WHY DOES IT MATTER? The economy’s official rate of inflation is calculated as the annual change in the Consumer Price Index (CPI), which has been constructed based on a fixed basket of goods and services that Canadians purchase. When inflation is high (in excess of 2-3%) and rising, the Bank of Canada (BoC) will typically increase its short-term policy interest rate; when it is “too” low (below 2%), the BoC will reduce its policy rate. These actions, and others, have implications for all interest rates, including but not limited to mortgage rates. CANADIAN PRICES SURGED IN SEPTEMBER The latest data on changes in the CPI show that annualized inflation was up to 4.4% in September, the second time it has breached the 4% threshold since March 2003—and, notably, the second time in the past 2 months. There was some variation in the rates of inflation across Canada, from a high of 5.1% in Quebec to a low of 3.3% in Nova Scotia. British Columbia’s inflation rate in September was 3.5%. Inflation is high and rising for a number of reasons, including ongoing supply-chain bottlenecks, base-year effects in the calculation of inflation (with last year’s depressed prices serving as the denominator in the equation of how much current prices have increased), and elevated sector-specific spending (on transportation, and thus on gasoline, for example). Due to persistently high Canadian inflation since the beginning of 2021, prices (as represented by the CPI) are currently 4.0% higher than they were at the beginning of the pandemic in February 2020. In comparison, if we had continued to experience annualized inflation of 2.1% as we had in the two years leading up to the pandemic, prices would have increased by only 1.8%; had we instead realized the BoC’s target of 2.0% since the beginning of the pandemic, the increase would have been even less, at 1.6%.
Price Level
128 130 132 134 136 138 140 142 144
142.9
139.6 139.8
137.4
+4.0% +1.8% +1.6%
@ 2% Bank of Canada Target @ 2.1% (pre-Feb 2020 2-year Avg) Actual
Total Increase Feb 2020 - Sep 2021
2021
2020
WHAT LIES AHEAD? In acknowledging the above-described sources of recent high inflation, with Canada working its way through the fourth wave of the pandemic, and with provincial and regional economies still operating at less than full capacity, our view is that high inflation readings are, overall, likely transitory. Having said this, “transitory” may mean that high inflation is a reality deep into 2022, rather than abating sooner. With this in mind, we will continue to monitor Bank of Canada decisions on its policy interest rate in response to ongoing inflation concerns and, arguably more importantly, the language it uses to signal the potential for upcoming rate changes.
For further information please contact Ryan Berlin (rberlin@rennie.com) or Ryan Wyse (rwyse@rennie.com). The information set out herein (the “Information”) is intended for informational purposes only. RAR & RMS has not verified the information and does not represent, warrant or guarantee the accuracy, correctness and completeness of the information. RAR & RMS does not assume any responsibility or liability of any kind in connection with the information and the recipient’s reliance upon the information. The recipient of the information should take steps as the recipient may deem necessary to verify the information prior to placing any reliance upon the information. The information may change any time without notice or obligation to the recipient from RAR & RMS.
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