In June 2022, inflation reached its peak at 8.1%. The expectation was that inflation would gradually decrease month-to-month and stabilize around 3% this year. From July onwards, inflation did follow a downward trend, despite global challenges. However, in a surprising turn of events, inflation increased by 0.1% in April, reaching 4.4% compared to the previous month’s reading of 4.3%.
Although this increase is relatively small, it marks a reversal of the nine-month downward trend. When examining specific inflation indexes such as Common, Trim, and Median, they all showed a slight decrease in April.
Cost of Living
The cost of living is a significant driver of inflation, and global influences, particularly fluctuations in oil prices, have played a role in recent years. Looking at the price of WTI Crude, it was $115.26 in June 2022, but it dropped to $76.78 by the end of April 2023 and further down to $68 by the end of May. Diesel fuel prices have also decreased, and shipping rates have come down due to resolved supply chain bottlenecks, potentially leading to lower prices for some consumer goods. Employment numbers, while still resilient, are showing signs of cooling.
Another contributing factor to inflation is mortgage costs, which increased as the Bank of Canada raised rates. This increase is considered in inflation calculations.
On May 31st, StatsCan reported that the economy grew at an annualized rate of 3.1% in the first quarter of 2023, surpassing the forecasted 2.5% growth. However, recent indications suggest that the economy is beginning to cool, which the Bank of Canada may view as positive news as it could lead to a decrease in inflation.
Rate Increases
Forecasters and Central Banks analyze various scenarios and strategize accordingly. If the Bank of Canada considers April’s inflation increase as a temporary blip rather than a reversal, they will likely maintain their current stance on interest rates. On June 7th the Bank of Canada increased its target overnight rate to 4¾% and is implementing a policy of quantitative tightening. Globally, consumer price inflation is decreasing due to lower energy prices, but underlying inflation remains high. Major central banks are considering further interest rate increases to restore price stability. In Canada, the economy exceeded expectations with strong GDP growth, driven by robust consumption and rebounding service demand. The labor market remains tight, reflecting high demand for workers. Consumer price inflation increased to 4.4%, driven by higher prices for goods and services. The Bank expects inflation to ease to around 3% but is concerned about sustained excess demand and elevated core inflation. Based on this evidence, the Bank increased the policy interest rate to address these concerns and normalize inflation. The Governing Council will continue to assess inflation dynamics and other factors to achieve the inflation target. The Bank is dedicated to restoring price stability for Canadians.