Canadian inflation blows past expectations, spiking to 6.7%

CANADIAN consumer price inflation shot past expectations in March, jumping to a new 3-decade high and cementing expectations the Bank of Canada will continue with aggressive interest rate hikes in coming weeks.

Annual inflation rose to 6.7 per cent last month, up from 5.7 per cent in February, Statistics Canada reported on Wednesday (Apr 20). That's the highest since January 1991 and exceeds the median estimate of 6.1 per cent in a Bloomberg survey of economists. The report shows inflation pressures that are more elevated than the central bank estimated just last week, reinforcing pressure on policymakers led by Governor Tiff Macklem to withdraw stimulus from an overheating economy. Investors see strong probability of a second half-percentage point rise at its next meeting, after officials delivered a jumbo hike last week.

"Today's surprise on inflation substantially increases the odds that we do see another 50-basis-point hike in June," Josh Nye, an economist at Royal Bank of Canada, said in an interview on BNN Bloomberg Television. Bonds were hit hard. The benchmark Canadian government two-year yield shot up to nearly 2.56 per cent - the highest since October 2008 - from about 2.52 per cent before the release. The 10-year yield moved above 2.8 per cent.

Prices rose by 1.4 per cent in March alone, the biggest 1-month increase since the country introduced a federal sales tax in 1991. The reading may represent the peak of the run-up in annual price gains, capturing the impact of soaring food and energy costs after Russia's invasion of Ukraine. Still, the return to anything resembling normal is expected to be prolonged and that's a worry for policymakers trying to prevent inflation expectations from hardening at current levels.

And while petrol prices were the biggest contributor to the monthly and annual gain in prices, inflation has become broad-based with sharp increases in costs for housing, food and cars. The average of the central bank's core measures - often seen as a better indicator of underlying price pressures - rose to 3.77 per cent, also the highest since 1991. Goods inflation hit 9.2 per cent in March, the highest since 1982. Services inflation rose to 4.3 per cent, the highest since 2003.

Macklem and his officials forecast inflation would slow to an average 4.5 per cent by Q4 this year. Inflation averaged 5.8 per cent in Q1, versus Bank of Canada estimates of 5.6 per cent. On a seasonally adjusted basis, prices jumped 0.9 per cent in March, matching a record high. Petrol prices were up 12 per cent on the month, and 40 per cent on-year. Food prices were up 7.7 per cent from a year earlier, after a 0.9 per cent gain in March. Grocery prices were up 8.7 per cent on an annual basis. BLOOMBERG

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