Inflation bounced back as economy reopens
July 22, 2020 | 2-min read
Focus Area—Canadian Economics
The Conference Board of Canada’s Economist Anna Feng offers the following insights on today's Consumer Price Index (CPI) data
Inflation rebounded 0.7 per cent in June as economic activity resumes through the gradual reopening of the economy. Core inflation edged up 1.8 per cent, moving closer to the Bank of Canada’s 2.0 per cent target. Businesses operating under costly COVID-19 restrictions could push up consumer prices near-term, despite the weak state of the economy.
- The Consumer Price Index rebounded 0.7 per cent in June compared to its level last year, following two months of deflation. Year-over-year inflation ticked up 1.1 percentage points in June compared to May, the strongest gain since March 2011.
- Gasoline prices have been largely responsible for the decline in overall inflation since the start of the pandemic, dropping by over 30 per cent between February and April. However, over the last two months global oil prices have solidified, and so have gasoline prices in Canada, averaging just 10 per cent below February levels in June. Excluding the impact of gasoline prices, consumer prices were up 1.2 per cent.
- In addition to higher energy prices, an increase in food prices (up 2.7 per cent) propped up inflation in June. Beef prices rose 8.3 per cent month over month—the largest increase since May 1982—because of shutdowns at meat processing plants affected by Covid-19 outbreaks.
- The average of three core inflation measures used by the Bank of Canada inched up 0.1 percentage point to 1.8 per cent in June, moving closer to the Bank’s 2.0 target.
- As most shopping malls were allowed to re-open in June, clothing and footwear prices grew by a slight 0.1 per cent on a month over month basis, putting an end to the losing streak started in April. Passenger vehicle prices were also up in June, helping to mitigate the overall decline in goods prices.
- Overall, stronger prices in June reflect the pickup in economic activity as the economy gradually re-opens. Despite the weak state of the economy, core measures of inflation are close to the Bank of Canada target rate. For many businesses, operating while COVID-19 remains a health risk will be costly. This could result in higher prices despite the weak state of the economy.