Economic insight provided by Alberta Central Chief Economist Charles St-Arnaud.
Inflation continued to accelerate in February and reached a level not seen since the early 1990s. The high level of inflation continues to be mainly due to a handful of components: gasoline prices, food prices, homeowners’ costs, utilities costs and motor vehicles prices. Altogether, these five items are responsible for about 4.3 percentage points of the 5.7% inflation rate. Nevertheless, there are increasing signs that inflationary pressures are broadening, with two-thirds of the components of CPI rising at more than 3% y-o-y (see Fig 1) and various core measures of CPI accelerating sharply.
Additionally, the recent trend in the CPI monthly changes suggests that inflationary pressures remain elevated. As such, the 3-month annualized change in most of the CPI components remains well above 2% and above their year-on-year changes (see Fig. 2). These pressures are partly due to supply constraints resulting from the pandemic, a surge in shipping costs and the broad-based increase in commodity prices, especially energy.
The sharp increase in commodity prices since the invasion of Ukraine by Russia will lead to further inflationary pressures and will push inflation higher in the coming months (see).
With inflation well above its target of 2% and more persistent than initially thought, inflation expectations rising and a broadening of inflationary pressures, we believe the Bank of Canada will continue to hike interest rates. Our view remains that the BoC will increase its policy rate at the April and June meetings, bringing it to 1.00% by the summer. We expected another hike before the end of the year, which would push the policy rate to 1.25% by year-end. However, with inflation likely to increase more than expected in the coming months, there is a risk the BoC may hike more than currently expected.
In Alberta, inflation remained jumped to 5.5%. As is the case nationally, most of the inflation is due to higher energy costs (gasoline, electricity and natural gas), motor vehicles and food prices. We note that core inflation for the province also jumped higher in February but remains lower than in the rest of the country at 3.1%.
The Consumer Price Index (CPI) increased by 1.0% m-o-m non-seasonally-adjusted in January. The inflation rate accelerated to 5.7%, its highest level since 1991. Prices rose on the month in all of the eight major CPI components, with transportation (+1.9% m-o-m), and recreation, education and reading (+1.4% m-o-m) and food (+1.3% m-o-m) increasing the most. On the flip side, alcohol, tobacco and cannabis(+0.2% m-o-m), clothing and footwear (+0.4% m-o-m), health and personal care (+0.4% m-o-m), and household operations, furnishing and equipment (+0.7% m-o-m), saw the smallest increase on the month.
The increase in food (+0.2 percentage points(pp)), transportations (+0.3pp) and shelter (+0.2pp) were the main contributors to the monthly increase in CPI. Gasoline prices increased 6.9% m-o-m and were responsible for most of the increase in transportation costs.
Six of the eight major CPI components accelerated in February on a year-on-year basis, led by shelter cost, transportation costs and food prices. Shelter cost rose 6.6% y-o-y, the highest since 1983, as owned accommodation costs, mainly homeowners’ replacement costs and other owned accommodation costs continue to increase. Shelter costs are the primary source of inflation, contributing 2.0 percentage points (pp) to inflation. Transportation costs acccelerated to 8.7% y-o-y, contributing 1.4pp to inflation, with gasoline prices being the main source of cost increases in the category (+31.7% y-o-y contributing 1.1pp). Food prices inflation reached its highest since 2009 at 6.7% and contributed 1.1pp to inflation.
Goods prices inflation accelerated to 7.6% in February from 7.2% and services inflation to 3.8% from 3.4%. Energy prices also accelerated, increasing by 24.1% since February of last year. Excluding food and energy, prices rose 0.6% on the month and increased by 3.9% compared to the same month the previous year, the fastest since 2003. The Bank of Canada’s old measure of core inflation, CPI excluding the 8 most volatile components and indirect taxes, edged higher to its highest level since 1987 of 4.8%.
Looking at the BoC’s core measures of inflation, they all accelerated in Febuary. CPI-Trim rose to 4.3 % form 4.0%, CPI-Median to 3.5% from 3.4% and CPI-Common to 2.6% from 2.4%. The average of the core measures increased to 3.5%, its highest since 1991.
Implications for Alberta
In Alberta, inflation remained accelerated to 5.5% in February, the highest since 2007. Transportation costs remain the main contributor to inflation (contributing +2.1pp), mainly due to increased gasoline prices and motor vehicle prices. Shelter costs are another important contributor to inflation (contributing +1.7pp), mainly due to rising utilities costs, especially electricity and natural gas prices. Food prices are also an important source of inflation, contributing +1.0pp. Goods price inflation increased to 85% and services price inflation rose to 2.6%. Inflation excluding food and energy jumped to 3.1, while energy costs decelerated to 31.3% compared to the same month last year.
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