Economists say inflation climbed higher due to ‘reopening effect’
Prices have been soaring globally for everything from food to furniture to gasoline, as pandemic restrictions have eased.
Economists are predicting an even higher reading of inflation for June as energy and food prices crept higher and the economy reopened further.
The consumer price index in Canada hit a nearly 40-year high of 7.7 per cent in May. Now, economists are forecasting that number hit at least eight per cent last month.
Statistics Canada will release inflation data for June on Jul. 20, a week after the Bank of Canada raised its key interest rate by a full percentage point.
Prices have been soaring globally for everything from food to furniture to gasoline, as pandemic restrictions have eased. Energy prices skyrocketed 35 per cent year-over-year, while food prices rose by about 10 per cent.
And more increases are on the way, with several food suppliers warning grocery retailers to expect further price hikes.
Derek Holt, head of capital markets economics at Scotiabank, projects inflation hit 8.9 per cent in June due to a “reopening effect.”
“Restrictions coming off the pandemic fell even further into June and that unleashed a whole wave of activity — more people dining, more people flying, more people getting out on a boat,” Holt said.
An RBC report published on Jul. 15 said price acceleration in June is expected to be the result of even higher food and energy prices.
“Oil prices rose another 4.8 per cent from May and consumer food prices have been surging in part due to higher commodity prices and acute supply chain disruptions,” the report said.
For Canadians whose wages continue to lag inflation, rising prices are leaving them worse off financially.
In June, average hourly wages were 5.2 per cent higher than a year ago.
The Bank of Canada said global pressures are largely to blame for soaring inflation, with the Russian invasion of Ukraine and supply chain issues putting pressure on energy and food prices.
In the U.S., inflation climbed to another multi-decade high in June, hitting 9.1 per cent.
Domestically, the central bank said the economy is “overheated” as businesses struggle to find workers and demand for their products remains strong. The unemployment rate reached a record low of 4.9 per cent in June.
Another factor that threatens to keep inflation high is rising inflation expectations among consumers and businesses, as evidenced by surveys conducted by the Bank of Canada.
With the interest rate being its only tool against inflation, the central bank is hoping it can slow domestic demand and manage inflation expectations with its supersized rate hike.
The Bank of Canada is forecasting inflation to reach eight per cent over the next few months before beginning to decline to 4.6 per cent next year.
