Despite aggressive interest rate hikes and an economy that is beginning to cool, inflation in Canada remained elevated in October. The consumer price index rose by 6.9% on a year-over-year basis, matching September’s increase. On a month-over-month basis, the index rose by 0.7%, the largest increase since June.
Excluding food and energy, inflation increased by 5.3% year over year.
The uptick in the month-over-month CPI alone is not a reason to worry because it was caused largely by the increase in gasoline prices (9.2%), which occurred because of announcements of production cuts by OPEC and the weakening of the Canadian dollar. In addition, gasoline prices have stayed steady since October.
What is more concerning is that measures of core inflation have barely budged, showing that even without the volatile categories like food and energy, prices refuse to ease despite the Bank of Canada’s efforts.
Surging food prices
Relief for households is nowhere in sight as food inflation surged by 10.1% year over year. Prices of dairy rose by 10.6% and eggs by 13.8%, both because of approved increases from governing boards.
Food prices in Canada tend to rise in the winter as more is imported, and with the strong American dollar, this winter could be even worse. That said, with an investigation into Canada’s grocery industry on the way, it remains to be seen whether food price increases will slow anytime soon.
In addition, mortgage interest costs rose by 11.4% year over year, the fastest pace since 1991, because of rising interest rates. Property taxes (3.6%) and rent (4.7%) also went up on the month, further straining households’ budgets.
Add to that surging wages, which rose by 5.6% on the month, and we have a recipe for stubborn inflation. The Bank of Canada will most likely announce a 25 basis-point rate hike in December and might not pause until early next year, which will induce greater economic pain.
In the end, taming inflation is an exercise in patience. Until measures of core inflation show meaningful declines and the economy sufficiently cools, interest rates will need to stay high.