Canada's inflation data for August will be released on Tuesday, with analysts forecasting the headline rate will edge down to 7.3%, from 7.6% in July. Six of eight economists surveyed by Reuters see core inflation peaking in the fourth quarter as underlying domestic and global pressures start to ease, though the path back to the 2% target will not be brisk.
Over the summer, the consumer price index dropped slightly to 7.6% in July from 8.1% in June. While overall inflation may have peaked, most of the drop was due to gasoline prices. Inflation has continued to rise and broaden across goods and services. And globally, we’re still seeing supply chain bottlenecks and high commodity prices, both of which contribute to inflation here in Canada. Domestically, demand continues to outpace supply. Consumer spending, particularly on services, was robust in the second quarter of 2022. And significant labor shortages persist, with the unemployment rate at its lowest level ever.
The unemployment rate in Canada rose to 5.4% in August of 2022 from the record-low of 4.9% observed in the previous two months, well above market expectations of 5%. It was the first increase in the jobless rate in seven months.
Inflation is forecast to fall sharply to near target by the end of 2024, from about 8% currently. Economists see that happening without borrowing costs rising too far into restrictive territory, with the policy rate peaking in October at 3.75%, according to the median estimate in the survey.
Policymakers led by Governor Tiff Macklem raised the benchmark overnight rate by 75 basis points to 3.25% at the last meeting on September 7th, giving Canada’s central bank the highest policy rate among major advanced economies. Officials said they expect to continue raising rates in the coming months. “Given the outlook for inflation, the governing council still judges that the policy interest rate will need to rise further,” officials said in the statement. Markets are pricing in a strong chance of another half-percentage-point increase in October.
The rate increase follows a surprise 100-basis-point hike in July, and half-point moves in April and June, making the current tightening effort one of the most aggressive ever. The overnight rate sat at an emergency pandemic low of 0.25% until the beginning of March.
Tiff Macklem, governor of the central bank, said in a National Post op-ed Tuesday following the Statistics Canada release that while it looks like inflation “may have peaked,” high prices will stick around for a while longer. He explained that the Bank of Canada’s role is to raise borrowing rates to make spending less attractive, thereby weakening demand and bringing price acceleration back down towards its two percent target.
"We think aggressive interest rate hikes will be followed by a recession next year which would prevent expectations from coming fully unanchored," said Nathan Janzen, assistant chief economist at Royal Bank of Canada.
“The scenario that we’re worried about is that Canadians look at the current rate of inflation, they think it’s here to stay, they start incorporating that thinking into long-term decision making,” the newspaper quoted Rogers as saying in a news conference after the rate hike.
Despite a more than 4% decline this year against its American counterpart, the Canadian dollar remains one of the best-performing developed-market currencies in 2022. The country’s economy has been helped by higher prices for commodities and energy and a scaling back of Covid restrictions, with growth actually accelerating in the second quarter even as global recessionary concerns mounted.
Gross domestic product rose at a 3.3% annualized rate after a 3.1% increase in the first three months of the year, Statistics Canada reported Wednesday. Growth was led by stronger household consumption and business spending on inventories. Economists surveyed by Bloomberg expected 4.4% annualized growth in the second quarter. Economists anticipate Canada’s growth rate will fall to below 1.5% annualized in the second half of this year and into 2023 amid one of the most aggressive hiking cycles ever by the Bank of Canada.
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