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Canadian Inflation Hits 19-Year High, Loonie Drops

by Karl Schamotta | November 17, 2021

Canadian prices climbed 4.7 percent on a year-over-year basis in October – matching market forecasts and keeping expectations for Bank of Canada rate hikes largely intact. Data released by Statistics Canada this morning showed the Consumer Price Index rising at the fastest rate recorded since 2003, meeting market expectations precisely. The index rose 0.7 percent in the month, jumping from September’s 0.2 percent increase.

Increases were broad-based: Gains were recorded in all major categories, with passenger vehicles becoming 6.1 percent more expensive, food up 3.8 percent, and shelter costs up 4.8 percent.

Housing costs continued to climb: The homeowners’ replacement cost index – a proxy for new home prices – rose 13.5 percent, matching last month’s gain as the largest yearly increase since the eighties, while the other owned accommodation expenses index, which includes commission fees on the sale of real estate, climbed 13.8 percent year-over-year. Mortgage interest costs fell 0.3 percent.

Yet energy prices drove much of the headline gain: A 25.5 percent year-over-year increase in energy prices pushed transportation costs up by 10.1 percent. Gasoline prices climbed 41.7 percent.

With volatile components extracted, price growth was more restrained: Core inflation, computed as the average of the three price measures preferred by the Bank of Canada (trim, median, and common), increased an annualized 2.67 percent, unchanged from September’s level. Core measures strip out highly-volatile categories, and are often used to develop a better understanding of price pressures in the underlying domestic economy.

Monetary tightening is likely: With price increases topping the Bank of Canada’s target for seven months running, markets expect policymakers to hike at least five times over the next twelve months.

But markets are disappointed: The Canadian dollar fell almost 50 basis points on the release, suggesting that traders were prepared for a consensus-busting headline number above the 4.7 percent mark.

And it’s important to note that price pressures are global: Earlier this morning, the United Kingdom’s Office for National Statistics said year-over-year inflation hit 4.2 percent in October, blowing past already-aggressive market expectations at 3.9 percent. Final numbers for core euro area inflation hit 2 percent in the same month – a 19-year high, by our reckoning.

The Bank of Canada can’t stop the tide: Changes in domestic monetary policy – although arguably important for signalling reasons – won’t alleviate inflation pressures that are global in nature. Ebbing supply chain issues, falling commodity prices, and lower levels of fiscal support are likely to prove more important over the year ahead.

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