Canada’s main inflation gauge increased 6.8 per cent in April from a year earlier, one of the fastest rates since the early 1980s. Here’s what you need to know.
How bad is it?
Not as bad as the United Kingdom, where inflation surged to nine per cent in April, according to figures published ahead of the new Canadian numbers.
But headline inflation of 6.8 per cent is still pretty bad. Year-over-year increases in the consumer price index spiked to 6.9 per cent in January 1991, and hovered around six per cent for much of that year. Otherwise inflation hasn’t been this hot since the early 1980s.
There’s some evidence that the pace of increases is slowing. The headline number was 6.7 per cent in March, which represented a startling increase from 5.7 per cent in February and 5.1 per cent in January.
What’s causing it?
The same things that caused inflation to break out of the top of the Bank of Canada’s comfort zone of one per cent to three per cent back in April 2021: commodity prices and costs related to housing.
Gasoline prices were 36-per-cent higher than in April 2021, Statistics Canada said. The agency’s measure of what it would cost homeowners to replace their existing homes if they were to buy at current prices increased about 17 per cent, and general home expenses increased 13 per cent. Automobile prices and restaurant meals are the other big drivers.
Is everything more expensive?
Not everything. Mortgage fees and telephone services are lower, and the cost of travel tours plunged 18.6 per cent from April 2021.
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Does the Bank of Canada have an answer?
Yes: Higher interest rates.
The Bank of Canada has acknowledged that it misjudged the upward pressure on prices. The central bank’s latest quarterly economic outlook had year-over-year increases in the consumer price index averaging 5.6 per cent over the first quarter, and instead it averaged 5.8 per cent, the institution’s current forecast for the second quarter. Inflation is hotter than policymakers anticipated, which means they have little choice but to take a steeper path back to a higher interest-rate setting. Their primary mission is to keep the consumer price index increasing at annual rates of about two per cent. They have work to do.
Bank of Canada Governor Tiff Macklem has all but said that he will raise the benchmark interest rate a half point when policymakers next adjust policy on June 1. That would push the rate lenders use as a guide for mortgage rates and other credit to 1.5 per cent, compared with 0.25 per cent at the start of the year.
The central bank’s leaders have indicated they won’t stop until they get the target rate to a “neutral” setting, which they define as something between two per cent and three per cent. Macklem has also said that he might have to nudge the benchmark rate above three per cent to get inflation back to target.