Inflation is proving to be persistent in Canada, with the Consumer Price Index increasing at an annual pace of 4.4% in September amid shortages of workers and supplies.
The CPI increased at an annual pace of 4.4% in September as businesses scrambled to find workers and supplies.
Excluding the volatile food and energy categories, the index rose by a more moderate 3.3% on a year-over-year basis, but it was still the fastest rate since 2003, according to data released by Statistics Canada on Wednesday.
Businesses and consumers experienced high inflation across categories as the Canadian economy reopened and demand surged. This inflationary phase has defied predictions by the Bank of Canada earlier this year that it would be short-lived as the balance between supply and demand evened out.
But the supply chain crisis shows no sign of easing any time soon and it is having a ripple effect across the economy. In addition, the labor shortage has also contributed to rising prices as businesses are pressured to offer higher wages and pass those costs on to consumers.
These trends will most likely last well into next year as wages rise in a tight labor market and as the knots in the global supply chain are worked out.
Increases across categories
The rise in the Consumer Price Index was broad-based, showing up across all major categories. The most notable increases were in transportation, which rose by 9.1% year-over-year and by 0.4% on the month; food, which rose by 3.9% year-over-year and by 0.3% on the month; and shelter, which increased by 4.8% year-over-year and by a monthly 0.3%.
The surge in food prices was a combined result of the supply chain disruptions and extreme weather events. Droughts and heat waves badly hurt crops, and since grains are also used as feed for animal products, meat prices surged from a year ago.
The price of gasoline jumped a whopping 32.8% on a year-over-year basis because of extremely low prices last year during the pandemic, which lowered production. But gasoline was down by 0.1% from August because of uncertainty surrounding the delta variant.
Energy and gasoline prices will continue to fluctuate for the rest of the year as uncertainty on both the supply and demand prevails.
Consumer demand, despite being strong during the economic recovery, might begin to wane as high prices persist.
The takeaway
The September Consumer Price Index for Canada is only the latest sign that the economic recovery will not necessarily be smooth as it works through the significant shock of the pandemic. Though higher prices were observed across all categories, they were more prominent in those with more volatility like food and energy.
Although continued high inflation will undermine real economic growth, expect the Bank of Canada to adopt a wait-and-see approach before taking drastic action on interest rates next week.
