Inflation in Canada hits 4.7% amid soaring gas prices

October inflation in Canada climbed to 4.7%, the highest since February 2003 and up from 4.4% in September, primarily because of skyrocketing gasoline prices, according Consumer Price Index data released by Statistics Canada on Wednesday. Excluding food and energy, inflation stood at a more moderate 3.3% yearly increase, matching September’s figure. Gasoline has hit CA$1.6 per liter, or CA$6.2 per gallon, up a whopping 41.7% from a year ago. Transportation and utilities, the latter including water, fuel and electricity, also increased by 10.1% and 8.6%, respectively. The rise in utilities prices stems from high energy prices. Shelter, which accounts for a sizeable portion of consumers’ overall spending, rose by 4.8% on a yearly basis. Shelter prices would have been even higher if not for the rent control and eviction moratorium implemented across most cities and provinces when the pandemic hit. While owned accommodation prices increased by 5.1% on an annual basis, rented accommodation went up by 1.9%, right around the rent control cap of 2%, which kept accommodation prices artificially lower than market prices.

The inflation problem

Inflation is proving to be a serious hurdle in Canada’s road to recovery. Faced with high prices of essential, hard-to-substitute goods like food and energy, consumers have had to tighten their budgets, curbing discretionary spending. Already, retail sales have suffered, suggesting that businesses cannot ride the pent-up demand wave forever. Inflation is on track to hit 5% by year’s end as gasoline prices stay elevated. Food prices will keep climbing as most fresh produce is imported when Canada’s ground freezes over, and the supply chain that gets produce from Central America and Asia is now facing monumental challenges. But inflation will fall next year. As the rest of the world reopens, manufacturing restarts on the other side of the world, and border restrictions are lifted, the supply chain knots will become untied. In addition, energy and gasoline prices, the historically volatile components that are driving the current high inflation, are expected to decline in the warmer months. By the end of next year, inflation should come back down to around the usual 2%.

The takeaway

But first, there is the winter to get through. High inflation fueled by energy and gasoline prices will continue throughout the cold months. While the Bank of Canada indicated it might increase interest rates early next year, the rise will most likely be moderate to not further discourage consumer spending, which is still very much needed for Canada’s economic recovery.