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The consumer-led pandemic recovery is in high gear. You only need to look at the inflationary data to see that. In January, Canada’s inflation rate hit a 30-year plus high, with the consumer price index up 5.1% from a year earlier. This exceeded market expectations of 4.8%.

What Is Canada’s Inflation Rate?

This marks the first time that inflation has surpassed the five percent mark and comes on the heels of December’s pace of 4.8%. January’s torrid acceleration also marks the 10th consecutive month that inflation has exceeded the Bank of Canada’s target range of one percent to three percent.

Excluding gas, the Consumer Price Index advanced 4.3% from January 2020, the biggest increase since Statistics Canada unveiled the measure in 1999. Meanwhile, housing costs were up 6.2%, the fastest annual pace since 1990. And grocery prices climbed 6.5% on an annual basis in January.

No matter how you look at the data, inflation is spreading throughout the entire economy. Where higher prices were once limited to a number of goods, including gas, food, and housing, prices for every major category in the consumer price index in January increased on both a year-over-year and sequential basis.

The average of the Bank of Canada’s core measures of annual inflation (which strips out extreme price swings) still rose 3.2% from 3.0%, the highest since 1991.

What Is Driving High Inflation?

Soaring inflation, which the Bank of Canada once insisted was transitory, is now persistently high and growing. Prices on everything are rising for a number of key reasons, including supply chain disruptions, labour shortages, and robust consumer demand. Near record low interest rates are fueling Canada’s blistering real estate market.

Now, with inflation out of control, there’s no question that the Bank of Canada will raise its key lending rate when it meets next on March 2. With the central bank now playing catch-up on inflation, the question is how high will it raise rates?

Typically, the Bank of Canada raises its borrowing costs by a quarter-point. But with inflation at levels not seen in three decades, it may need to raise it a half point. After that, the Bank of Canada is expected to announce a series of steady rate hikes over the coming quarters.

Investors are pricing in at least four rate hikes in a row and we could see as many as seven over the next year. That would take the central banks key lending rate, which currently stands at 0.25% to its pre-pandemic level of 1.75%. It could be 2.0% if it introduces a half point increase in March.

A 600% to 700% jump in borrowing rates over one year would have a material impact on not just Canadian households, but also the stock market. Just as inflation has been.

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