Canadian inflation continues to run at breakneck speeds; it’s highest level in 18 years. Even though economists tell us it’s only temporary, it’s taking a big chunk out of our spending and putting a dent in our standard of living.
Higher inflation is also bad for stocks because it makes borrowing more expensive and reduces earnings growth, which puts downward pressure on share prices.
Why Is Inflation Surging?
Canadian inflation surged in August to 4.1% from a year earlier, it’s quickest pace since 2003. This comes after a 3.7% reading in July, which was then the highest reading in a decade. And it’s caught even the Bank of Canada off guard. For the last five consecutive months the annual rate of inflation has topped the central banks target range of one percent to three percent.
Virtually every type of good or service became more expensive in August than it was last year at this time. Shelter was up 4.8%, food 2.7%, furniture prices rose by 8.7%, appliances were up 5.3%, transportation 8.7%, airfares surged 34%, hotel prices jumped 20%, and the price of new cars 7.2%.
While you can’t argue with the facts, the biggest reason why inflation has been surging is because consumer prices were down drastically last year at this time. And we’re measuring today’s figures with those from a year ago.
When COVID-19 hit, the Canadian, U.S., and a large portion of the global economy shut down. Businesses shuttered their doors and consumers were forced to stay at home under quarantine orders. Demand for products fell and prices slumped. But now that the economy is opening up, there is a huge demand for products, services, and raw materials, which has impacted prices.
Because inflation is calculated on a year-over-year basis, the increase in inflation is much more pronounced. Does that mean though that it’s entirely transitory?
Not entirely. The homeowners replacement cost index, which is related to the cost of maintaining a home and is tied to the price of new structures, soared by 14.3% in August—the largest annual increase since 1987 and the fourth consecutive month of double-digit growth.
While some aspects of inflation may be transitory, the homeowners price index doesn’t compare prices from a year ago. As a result, we can’t blame the rising cost of things entirely on the easing of restrictions and opening of the economy.
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