Economic commentary provided by Alberta Central Chief Economist Charles St-Arnaud
Inflation continues to accelerate
Bottom line
Inflation continued its acceleration in September. The high level of inflation continues to be partly attributed to a base effect. We estimate that the base effect pushed headline inflation higher by 1.9 percentage points (pp) in September compared to 1.9 pp August. Nevertheless, the recent trend in the Consumer Price Index (CPI) monthly changes continues to suggest that inflationary pressures are mounting. As such, the three-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.
With inflation above the Bank of Canada’s target of 2% and the average of its core measures at its highest since 2008 and no signs of moderation on the horizon, we believe the central bank is gradually getting concerned by the inflation outlook. As such, the Bank of Canada has already changed its view of inflation slightly to mention that inflation is likely to be somewhat more persistent than initially expected. However, we believe that the Bank of Canada continues to view the current inflation episode as temporary.
Whether inflationary pressures become persistent will depend on how lasting the supply constraints will be, how fast the current level of slack in the economy is resorbed and whether higher inflation feeds into inflation expectations and wage growth. The longer inflation remains high, the more likely it will lead to a rise in inflation expectations. Already, the latest release of the Business Outlook Survey shows that Canadian businesses have revised their inflation expectations and are considering passing the increase in input cost to customers.
In Alberta, inflation decelerated after hitting its highest level in a decade. As a result, inflation, both headline and excluding food and energy, is now lower than in the rest of the country. However, this does not indicate inflationary pressures are less significant than elsewhere in Canada, as most of the moderation comes from lower utility costs.
CPI increased by 0.2% month-over-month non-seasonally-adjusted in September. The inflation rate accelerated to 4.4%, reaching its highest since 2003. Prices rose on the month in every of the eight major CPI components, with clothing and footwear (+1.5% month-over-month) and shelter (+0.3% month-over-month) contributing the most to the monthly increase. The increase in clothing and footwear costs resulted from broad-based price increases as the new collection hits the stores. Shelter costs continued to increase, pushed higher by homeowner replacement costs, other owned accommodation expenses and rent.
Many CPI components accelerated in September on a year-on-year basis, except for recreation, education and reading and health, and alcohol, tobacco and cannabis. Shelter costs, especially home ownership costs, remained the primary source of inflation, contributing 1.5 percentage points (pp) to inflation. Higher transportation cost (+9.1% year-over-year) remained an important contributor to inflation (+1.5pp), with gasoline prices surging 33% compared to the same month last year and passenger vehicle cost increasing by 7% over the same period. Goods prices inflation accelerated to 6.1% in September from 5.8%, while services inflation edged higher to 3.0% from 2.7%. Excluding food and energy, prices rose 0.2% on the month and increased by 3.3% compared to the same month last year. The Bank of Canada’s old measure of core inflation, CPI excluding the eight most volatile components and indirect taxes, accelerated to 3.7%, its highest level since 1990.
Looking at the Bank of Canada’s core measures of inflation, CPI-Trim and CPI-Median both edged higher by 0.1pp to 3.4% and 2.8%, respectively, while CPI-Common remained unchanged at 1.8%. The average of the core measures remained rose to 2.7%, its highest since 2008.
In Alberta, inflation moderated to 4.0% in September from 4.7%. The lower inflation rate was due to a reduction in prices pressure in the shelter component, owing to a decline in electricity, natural gas and rental cost. Transportation costs were the main contributor to inflation (+2.2pp), mainly due to increased gasoline prices and motor vehicle prices. Goods price inflation moderated to 6.2% and services price inflation to 2.2%. Inflation excluding food and energy eased to 2.4%.
Independent Opinion
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