Quick take

Transitory or not, inflation is here and it’s hot

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  • The Consumer Price Index (CPI) continued to inch higher in September, reaching 4.4 per cent, the highest year-over-year growth since February 2003. The month’s inflation figure was slightly higher than the consensus forecast of 4.3 per cent.
  • The growth of gasoline prices slowed down in September to negative 0.1 per cent compared to 0.4 per cent in August, but still more than 32 per cent higher than a year ago. Canadians are also paying more for food, with prices at grocery stores (+3.9 per cent) and restaurants (+3.1 per cent) running hotter this month. Meat prices were nearly 10 per cent higher than a year ago.
  • Excluding food and gasoline prices, inflation edged up 3.3 per cent in September, the highest year-over-year growth in 18 years. Shelter prices were up 4.8 per cent in September, powered by homeowner’s replacement costs (+14.4 per cent) and other owned accommodation expenses fees (+14.2 per cent). Goods prices continued their upward trend, registering a 6.1 per cent increase in September, up from 5.8 per cent in August.
  • Seasonally adjusted inflation went up 0.4 per cent in September, down from the 0.5 per cent in August.
  • The average of the three Bank of Canada’s core inflation measures climbed higher on the month (2.7 per cent) when compared to August (2.6 per cent). CPI-trim inched up 3.4 per cent from 3.3 per cent, CPI-median increased by 2.8 per cent from 2.7 per cent, and CPI-common held steady at 1.8 per cent.

Key insights:

  • September’s inflation print should remind the markets to go beyond the transitory vs persistent debate. Inflation has been above the Bank of Canada’s upper target range of 2 to 3 per cent for half a year. Something is transitory if it doesn’t change behavior. But we are seeing businesses change behavior, for example when it comes to setting higher prices for their goods and services. The rise in prices is a more long-lasting phenomenon and should be treated as such.
  • September’s inflation figure reflected rapid growth in consumer prices, which was mainly driven by higher production costs. Disruptions to supply chains, including power shortages in China, high shipping costs, and a lack of truck drivers in Canada are expected to last until the first half of next year. As a result, supply chain disruptions will continue to keep prices elevated. Even when things get better, supply chains will never be the same again. Supply disruptions of some sort will keep bothering the global economy until they are made more resilient.
  • We expect that inflation will keep running above the Bank of Canada’s upper target of 3 per cent until spring next year. If inflation figures continue to surprise on the upside, the Bank might be forced to hike interest rates earlier than the second half of next year. Though investors believe the BoC will hike thrice next year, we believe the Bank is likely to hike only once and that too in the fourth quarter of next year. If the Bank hikes too early it risks stalling growth and harming its own credibility, and if it waits too long, it risks pushing prices even higher. It’s not easy to being a central banker these days.

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Anna Feng

Anna Feng