Canadian Inflation is at 6.7%
StatsCanada just announced that consumer prices rose by 6.7% year-over-year in March which represents a full percentage point increase from their previous reading of 5.7% in February. Consistent with this, markets are pricing in a 50/50 chance another 25 basis points will be added to the overnight rate at the Bank of Canada meeting on June 1st.
What were the key factors that caused this spike?
There is no sugar-coating this. Bonds were badly beaten as it became clear once again that the Government of Canada two-year yield had shot up to 2.6%, the 5-year yield reached 2.75%, and the 10-year yield spiked above 2.825% immediately following the data release. The 5-year yield – so critical for setting the 5-year fixed mortgage rate – has nearly quadrupled over the past year, with economists suggesting this could drive up your monthly repayments substantially given that bond yields affect interest rates on mortgages depending on how long they’re held for.
In March, prices rose in all eight major factors related to inflation. Energy, commodity, and agriculture markets all went up due to their substantial effect on Canada’s economy and its resulting effects on the country’s housing price values. Additionally, due to a jobless rate that continues to set records for itself month after month increased the number of positions available in an already tight market. As a result of employment continuing to rise so do wages for Canadians – a phenomenon that could soon lead to higher prices in general should wages continue at this pace.
The highlights of inflation on Canadians
Gasoline prices are up significantly over last year alone, backed by strong demand and ongoing turmoil in the Middle East. However, excluding gasoline and other volatile food and energy components, inflation rose 3%, also the fastest pace since 1999.
The CPI climbed 1.4% in March, following a 1.0% gain in February on a monthly basis. This was the most significant increase since January 1991, when the goods and services tax came into effect. On a seasonally adjusted monthly basis, the CPI increased 0.9% as well (which was also a similar level as that seen during that aforementioned time period).
In March, gasoline prices rose 11.8% month over month because of supply uncertainty following Russia’s invasion of Ukraine. This led oil speculators to drive crude oil prices higher. Gasoline prices have been rising in the past year, with a 39.8% increase so far.
Prices for fuel oil and other fuels rose 19.9% this month compared to those from the same period last year and 61% last month comparing the current month with that of March 2012.
Goods inflation hit 9.2% in March, the highest since 1982. Services inflation rose to 4.3%, the highest since 2003.
How inflation rate affects Canadian economy?
Bond markets sold off worldwide today. The yield curve flattened as shorter-term yields increased more than their longer-dated counterparts, a reflection of the belief that central banks will accelerate their tightening process.
Today’s CPI report has proven that inflation pressures are much higher than the Bank of Canada expected only days ago when they raised interest rate levels.
This could well mark the top of the surge in inflation, but the return to the 2% inflation target could be prolonged, particularly if inflation expectations become embedded. For this reason, Governor Macklem is likely to tighten aggressively once again on June 1, which will further dampen housing activity.
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