Economic insight provided by Alberta Central Chief Economist Charles St-Arnaud.
Bottom line
Inflation continued to accelerate in April, reaching a level not seen since 1983. 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 5.2 percentage points of the 6.8% inflation rate. Nevertheless, inflationary pressures are broad, with about 70% the components of CPI rising at more than 3% y-o-y (see Fig 1) and various core measures of CPI accelerating sharply and reaching record levels.
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 3% 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 aggressively hike interest rates. Our view remains that the BoC will increase its policy rate by 50bp at the June and July meetings and ending the year at 2.50%.
In Alberta, inflation eased slightly to 6.3%, thanks to a decline in gasoline prices. As is the case nationally, most of the inflation is due to higher energy costs (gasoline, electricity and natural gas), homeownership cost, motor vehicles and food prices. We note that headline and core inflation for the province remains slightly lower than in the rest of the country at 4.3%.
The Consumer Price Index (CPI) increased by 0.6% m-o-m non-seasonally-adjusted in April. The inflation rate accelerated to 6.8%, its highest level since 1990 when the GST was introduced. Prices rose on the month in all of the major CPI components, except for recreation, education and reading (-1.2% m-o-m). The biggest increases were in health and personal care (+1.6% m-o-m), shelter (+1.1% m-o-m), and food (+0.9% m-o-m). On the flip side, alcohol, tobacco and cannabis (+0.3% m-o-m), and transportation (+0.5% m-o-m), thanks to a decline in gasoline prices on the month, saw the smallest increase on the month. The increase in shelter (+0.3pp) and food (+0.15pp) were the main contributors to the monthly increase in CPI.
Four of the eight major CPI components either accelerated or rose at the same pace in April on a year-on-year basis, led by prices, and shelter costs. Shelter costs rose 7.4% y-o-y, the highest since 1983, as owned accommodation costs, mainly homeowners’ replacement costs and other owned accommodation costs continued to increase. Shelter costs are the primary source of inflation, contributing 2.2 percentage points (pp) to inflation. Food prices inflation reached its highest since 1982 at 8.8% and contributed 1.4pp to inflation. Transportation costs were unchanged 11.2% y-o-y, contributing 1.8pp to inflation, with gasoline prices being the main source of cost increases in the category (+36.4% y-o-y contributing 1.3pp).
In April, goods prices inflation moderated slightly to 9.1% from 9.2% and services inflation accelerated to 4.6% from 4.3%. Energy prices also deccelerated, increasing by 26.4% since April last year. Excluding food and energy, prices rose 0.6% on the month and increased by 4.6% compared to the same month the previous year, the fastest since 1991. 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 records started in 1984 at 5.7%.
Looking at the BoC’s core measures of inflation, they all accelerated in March. CPI-Trim rose to 5.1 % form 4.8%, its highest on record, CPI-Median to 4.4% from 4.0% and CPI-Common to 3.2% from 3.0%. The average of the core measures increased to 4.2%, its highest since 1991.
In Alberta, inflation decelerated to 6.3% in April. Transportation costs was the main reason for lower inflation in April, as gasoline prices eased 6.0% m-o-m, and contributed 1.8pp to inflation. Shelter costs are another important contributor to inflation (contributing +1.9pp), mainly due to rising utilities costs, especially electricity and natural gas prices, owned accommodation costs. Food prices are also an important source of inflation, contributing +1.3pp. Goods price inflation eased to 8.7% and services price inflation rose to 3.9%. Inflation excluding food and energy remained unchanged at 4.3%, while energy costs decelerated to 25.5% compared to the same month last year.
Independent Opinion
The views and opinions expressed in this publication are solely and independently those of the author and do not necessarily reflect the views and opinions of any organization or person in any way affiliated with the author including, without limitation, any current or past employers of the author. While reasonable effort was taken to ensure the information and analysis in this publication is accurate, it has been prepared solely for general informational purposes. There are no warranties or representations being provided with respect to the accuracy and completeness of the content in this publication. Nothing in this publication should be construed as providing professional advice on the matters discussed. The author does not assume any liability arising from any form of reliance on this publication.
Alberta Central member credit unions can download a copy of this report in the Members Area here.