Canada's inflation rate jumps to 3.7% in July on rising housing costs, supply chain issues - The Globe and Mail

A for sale sign outside a home in Victoria, on June 1, 2018.

CHAD HIPOLITO/The Canadian Press

Canadian inflation surged in July with consumer prices rising at the fastest pace in a decade driven by increasing shelter costs and continuing supply chain problems.

The consumer price index rose 3.7 per cent in July from a year earlier, Statistics Canada reported Wednesday. That beat analyst forecasts of 3.4 per cent and surpassed the previous high this year of 3.6 per cent in May. On a seasonally adjusted month-to-month basis, the CPI rose 0.5 per cent.

The inflation figure, the fourth consecutive monthly reading exceeding the top of the Bank of Canada’s 1 to 3 per cent target range, creates a headache for the Liberal re-election bid. The cost of living is emerging as a key campaign issue, and Conservative Leader Erin O’Toole, at a Wednesday campaign stop in Quebec City, was quick to blame Liberal Leader Justin Trudeau’s “economic approach” for boosting consumer prices.

Opinion: Why inflation should be a key election issue

Despite the overshoot, the Bank of Canada is likely to continue to regard inflationary pressures as transitory, several economists said. The three “core” measures of inflation looked at by the Bank of Canada rose by an average of 2.47 per cent, the highest level since 2009. However, the “common-CPI” favoured by the central bank remained steady at 1.7 per cent.

“As a result, monetary policy-makers won’t be in any more of a rush to remove stimulus simply due to this report. The central bank will continue to focus on supporting the labour market, particularly in light of the potential challenges on the horizon with regards to the virus,” Royce Mendes, senior economist at CIBC Capital Markets, said in a note.

The central bank said last month that it expects overall inflation to remain above 3 per cent for the remainder of the year, before dropping close to 2 per cent next year. It is not expecting inflation to return sustainably to its 2 per cent target until 2024.

Prices in July were up in six of the eight product categories tracked by Statscan, with an increase in the cost of shelter contributing the most to the overall rise in CPI.

The homeowner’s replacement cost index, which is tied to the price of new homes, rose 13.8 per cent compared with last year, the largest annual increase since 1987. Likewise, the index that tracks other expenses for owned accommodation, including commission fees for real estate sales, was up 13.4 per cent year over year.

Meanwhile, the price of durable goods rose 5 per cent compared with the previous year, led by an increase in car prices. The index tracking passenger vehicle prices was up 5.5 per cent, year over year, which Statscan said was “partially attributable to the global shortage of semiconductor chips.”

Upholstered furniture prices shot up 13.4 per cent year over year, as furniture importers continue to face supply chain disruption from manufacturers in Asia and much higher shipping costs. Statscan also pointed to new tariffs on furniture introduced in May as a possible contributor to the price increase.

“The pandemic’s effect on price growth is not only on the supply side, where production disruptions are adding to the cost of manufactured goods such as autos, but also on demand, where policy supports have driven robust spending on housing and durable goods items,” James Marple, senior economist at Toronto-Dominion Bank, said in a note.

“We are also now starting to see the impact of faster price growth in reopening services sectors such as restaurants,” he said.

Gasoline prices were up 30.9 per cent in July, compared with the previous year, driven largely by year-over-year comparisons to lower gas prices early in the pandemic. That price increase is slightly slower than in June.

The closely watched price of food rose 1.7 per cent in July, compared with the previous year. Statscan highlighted food prices in its report, noting that the COVID-19 pandemic has changed supply and demand dynamics for food.

“Canadians consume different foods at restaurants than at home. For example, this shift led to a temporary oversupply of potatoes for French fries early in the pandemic. Suppliers also had to adapt, in some cases shifting products destined for restaurants to grocery stores,” Statscan said.

With restaurants reopening over the summer, the price of food purchased from restaurants grew by 3.1 per cent in July, year over year, the highest increase since January, 2019. By contrast, the price of food purchased in grocery stores that month rose 1 per cent.

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Canada's inflation rate jumps to 3.7% in July on rising housing costs, supply chain issues - The Globe and Mail
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