Canada’s inflation rate has risen to its highest level since 2011 — the cost of living went up by a good three percent in July, driven primarily by higher gasoline prices, airline tickets and tourism, according to data from Statistics Canada.
The July inflation rate was higher than what mosts economists expected, inching up from 2.5 percent last month — an inflation rate of two percent is what most economists consider “normal”.
“The primary influence for the rate rise was a big leap in gasoline prices that pushed the headline inflation number up,” said Karl Schamotta, Director of Global Product and Market Strategy at Cambridge Global Payments.
Global energy prices have soared in the last few months, mainly due to speculative forces and an overall demand for fuel across the world, especially in developing countries. In June, for instance, global natural gas prices rose for the first time in two years.
Headline inflation includes things like the cost of food and energy prices, elements that have a tendency to be very volatile in their pricing. A better measure of the overall cost of living is “core inflation” — on that front, Canada fared better in July, with core inflation hovering at the two percent mark.
“Food and energy are components that can induce a lot of confusion into measuring the cost of living — once these elements are filtered out, we’re looking at a healthy inflation rate of two percent year-over-year,” said Schamotta.
But the good news is that the Canadian economy has been performing very well as a whole. Wage growth — one of the most important measures of balanced economic growth across a country — is outpacing inflation for the first time since the 2009 financial crisis, and the unemployment rate is at 5.8 percent, the lowest it has been in a decade.
“On average you’re looking at a 3.5 percent wage growth, outpacing inflation, which paints an extremely favourable picture of the Canadian economy,” Schamotta told VICE Free.
So what, then is the immediate impact of the highest inflation rate in seven years? Economists are predicting that this month’s inflation rate will propel the Bank of Canada to raise interest rates even further, pushing up the average cost of borrowing. Central banks generally use the interest rate as a policy tool to keep inflation in check. When inflation is low, for instance, the interest rate is usually reduced, because a fall in interest rates will make borrowing cheaper.
“We do now expect an interest rate increase in October,” said a research note from Capital Economics. “Our forecast assumes another 25 basis points hike in the overnight rate before the end of this year, and another 50 basis points over the first half of 2019, which will bring the official interest rate to 2.25 percent by the end of 2019,” said another note from RBC Economics.
Canadians who over-extended themselves in the post-financial crisis borrowing binge that led to a real estate bubble in the country’s major urban centres have been feeling the pinch of interest rate hikes. Over the past 13 months, the Bank of Canada has raised interest rates four times — commercial banks have followed suit, pushing up monthly mortgage payments.