Canada’s consumer price index hit 4.8% in December, the highest since 1991 as supply chain disruptions continued, according to data released by Statistics Canada on Wednesday.
The inflation is driven by supply chain disruptions, pent-up demand and inflation expectations. While pent-up demand is expected to ease as pandemic spending winds down, supply chain strains and inflation expectations remain the biggest challenges, especially with the spread of the omicron variant.
Food prices are expected to keep rising for the rest of the winter especially as the Jan. 15 vaccine mandate, which prevents unvaccinated U.S. drivers from entering Canada, worsens the driver shortage, a key supply chain bottleneck.
The cost of inflation
There are deep implications associated with high inflation. Because fuel and food prices rise faster than other costs, inflation disproportionately affects lower-income households. Not only are their wages not likely to keep up with inflation, their jobs are also less likely to be remote, which means they cannot avoid spending money on gas.
The price of groceries, for example, rose by 5.7% on a yearly basis in December. It was a staggering increase, one that can be traced to unfavorable weather conditions and the supply chain struggles.
Supply chain bottlenecks affect perishable produce substantially more than other categories because of its time-sensitive nature, but the impact extends to durable goods as well.
The good news in the December inflation data is that gasoline prices finally showed signs of easing, falling by 4.1% from November and increasing by 33.3% on a yearly basis.
While increases in the prices of goods, which went up by 6.8% on a yearly basis, are no longer surprising, prices for services are now creeping up as well, jumping by 3.4% on a yearly basis in December and up from 2.9% in November.
Pressure to manage inflation expectations is mounting for the Bank of Canada, which has maintained the overnight rate at the lower bound of 0.25% to achieve maximum sustainable employment.
As the labor market heats up and slack in the economy is absorbed, the central bank will have good reasons to raise rates sooner than expected.
But there is little the Bank of Canada can do to address the biggest part of the inflation equation: the pandemic-induced supply chain disruptions.
The takeaway
While inflation is still expected to ease toward the latter half of this year, what we have seen so far have been bandage solutions on the supply chain. True structural solutions are needed to untie the knots in the supply chains and bring inflation back down.
