Inflation surged even higher in June amid ‘re-opening effect’, economists predict

Economists predict even higher inflation for June as energy and food prices rose and the economy reopened further.

Canada’s consumer price index reached a nearly 40-year high of 7.7 percent in May. Now economists predict that number reached at least eight percent last month.

Statistics Canada will release inflation data for June on Wednesday, a week after the Bank of Canada raised its key interest rate by a full percentage point.

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Prices have risen globally for everything from food to furniture to gasoline as pandemic restrictions have eased. Energy prices rose 35 percent year-on-year, while food prices rose about 10 percent.

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And more hikes are on the way, with several food suppliers warning supermarket chains to expect further price hikes.

Derek Holt, head of capital markets economics at Scotiabank, expects inflation to hit 8.9 percent in June as a result of a “reopening effect”.

“Restrictions from the pandemic fell even further in June, unleashing a wave of activity: more people dining, more people flying, more people getting on boats,” Holt said.

Click to play the video: 'Your Money: Exploring the Impact of Rising Interest Rates'

Your Money: Exploring the Impact of Rising Interest Rates

Your Money: Exploring the Impact of Rising Interest Rates

An RBC report published Friday said the price acceleration in June is expected to result from even higher food and energy prices.

“Oil prices have risen a further 4.8 percent since May and consumer food prices have risen, partly due to higher commodity prices and acute supply chain disruptions,” the report said.

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For Canadians whose wages lag behind inflation, rising prices are putting them in a worse position financially.

In June, average hourly wages were 5.2 percent higher than a year ago.

The Bank of Canada said global pressures are largely responsible for soaring inflation, with Russia’s invasion of Ukraine and supply chain problems putting pressure on energy and food prices.

In the US, inflation rose to a new multi-decade high in June, at 9.1 percent.

Click to play video: 'Inflation: Why the price of groceries is expected to rise'

Inflation: why the price of groceries is expected to rise

Inflation: why the price of groceries is expected to rise

Domestically, the central bank said the economy is “overheating” as companies struggle to find workers and demand for their products remains strong. The unemployment rate hit an all-time low of 4.9 percent in June.

Another factor that threatens to keep inflation high is rising inflation expectations among consumers and businesses, according to surveys from the Bank of Canada.

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With interest rates as its only instrument against inflation, the central bank hopes it can slow domestic demand and manage inflation expectations with its super-large rate hike.

The Bank of Canada made this point clear in its most recent monetary policy report.

“The bank is guarding against the risk of high inflation becoming entrenched, because if it does, the restoration of price stability will require even higher interest rates, leading to a weaker economy.”

“Restoring price stability – low, stable and predictable inflation – is paramount,” bank governor Tiff Macklem said in a news conference after the interest rate announcement.

However, Holt said the impact of the Bank of Canada’s most recent rate hike will take time to manifest.

Click to play video: 'Bank of Canada projects 'soft landing' approach to tackle inflation'

Bank of Canada projects ‘soft landing’ approach to tackle inflation

Bank of Canada projects ‘soft landing’ approach to tackle inflation

“That’s an experiment that will take six months to unfold,” he said.

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The Bank of Canada predicts inflation will reach 8 percent in the coming months, before falling to 4.6 percent next year.

Karyne Charbonneau, CIBC senior economist, said the Bank of Canada’s forecast for a decline in inflation in the coming year depends largely on global factors beyond the central bank’s control.

“These are the same factors that explain most of the errors in inflation forecasts over the past year, suggesting they are also the most difficult to predict,” Charbonneau wrote in a note.

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And while there are signs of cooling in Canada’s housing market, which would push headline inflation down, the cost of shelter is a relatively small part of the expected decline in inflation over the next year.

In June, average national house prices fell 1.8 percent year-on-year.

Without the easing of global pressure, Charbonneau said more aggressive action from the Bank of Canada will be needed.

“If we don’t get a little help from our friends abroad and a healthy dose of luck, we’ll need a recession to bring inflation down.”

© 2022 The Canadian Press

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