Economic commentary provided by Alberta Central Chief Economist Charles St-Arnaud

Bottom line

Inflation continued its acceleration in October. The high level of inflation continues to be partly attributed to a base effect. Nevertheless, the recent trend in the CPI monthly changes continues to suggest that inflationary pressures are mounting. As such, the 3-month annualized change in most of the CPI components remains above 2% and above their year-on-year changes (see fig. 1). Some of those pressures are due to supply constraints resulting from the pandemic, a surge in shipping cost and the broad-based increase in commodity prices.

We note, however, that the 3-month annualized change in CPI excluding food and energy and in the Bank of Canada’s old measure of core inflation are no longer above their year-on-year changes. This suggests that we could see some stabilization in core inflation and could mark an end of the acceleration, albeit at a high level.

With inflation above its target of 2% and likely to be more persistent than initially thought, the Bank of Canada has moved forward its forward guidance at its latest policy meeting. Nevertheless, as we have shown in the past (see Pep Talk for Central Bankers and Supply-Induced Inflation), given the nature of the inflationary pressures (supply rather demand), the central bank faces a trade-off between fighting inflation and risking stalling the recovery or tolerating higher inflation to allow further recovery in the labour market.

How soon the Bank of Canada will hike rates depends on whether inflation expectations become un-anchored and on how quickly the slack in the labour market can be absorbed in the coming months.

In Alberta, inflation accelerated, hitting its highest level in a decade. However, most of the acceleration was due to higher energy cost (gasoline, electricity and natural gas) and were not broad-based. As such, we note that core inflation for the province decelerated in October and remains lower than in the rest of the country.

The Consumer Price Index (CPI) increased by 0.7% month-over-month non-seasonally-adjusted in October. The inflation rate accelerated to 4.7%, reaching its highest since 2003. Prices rose on the month in every of the eight major CPI components, with transportation (+1.4% month-over-month) and shelter (+0.6% month-over-month) contributing the most to the monthly increase. The increase in transportation costs resulted mainly from an increase in gasoline prices. Shelter costs continued to increase, pushed higher by owned accommodation cost and utilities, especially natural gas prices.

Many CPI components accelerated in October on a year-on-year basis, except for clothing and footwear, and health and personal care. Transportation costs, especially gasoline, is the primary source of inflation, contributing 1.6 percentage points (pp) to inflation. Higher shelter cost (+4.8% year-over-year) remained an important contributor to inflation (+1.4pp), with owned accommodation cost increasing by 5.1%. Goods prices inflation accelerated to 6.5% in October from 6.1%, while services inflation edged higher to 3.2% from 3.0%. Excluding food and energy, prices rose 0.4% on the month and increased by 3.2% compared to the same month last year. The Bank of Canada’s old measure of core inflation, CPI excluding the 8 most volatile components and indirect taxes, edged higher to 3.8%, its highest level since 1990.

Looking at the Bank of Canada’s core measures of inflation, all three measure, CPI-Trim, CPI-Median and CPI-Common, were unchanged in October, staying at 3.3%, 2.9%, and 1.8%, respectively. The average of the core measures remained at 2.7%, its highest since 2008.

In Alberta, inflation rose to 4.3% in September from 4.0%. The higher inflation rate was due to a increase in prices pressure in the transportation and shelter component, owing to a rising electricity, natural gas and homeowners cost. Transportation costs were the main contributor to inflation (+2.4pp), mainly due to increased gasoline prices and motor vehicle prices. Goods price inflation accelerated to 7.3%, while services price inflation moderated to 1.9%. Inflation excluding food and energy eased to 1.9%, its lowest level since July.

Independent Opinion

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