Statistics Canada surprised the markets when it announced that the country’s inflation rate rose unexpectedly in April to 4.4%.
After cooling in March to 4.3%, economists were expecting the inflation rate to continue decelerating to 4.1%.
This represents the first increasing in inflation since June 2022, when Canada’s inflation rate hit a more than 40-year high of 8.1%.
What Impacted Canada’s Inflation Rate?
According to Statistics Canada’s latest Consumer Price Index report, fuel, groceries, and real estate were the biggest reasons for the increase. Food prices, which include groceries and food from restaurants, increased 8.3% in April, down from the 8.9% year-over-year increase in March. Restaurant prices meanwhile were up 6.4%, which is down from the 7.2% increase in March.
Prices at the pump were also up, rising 6.3% in April. That’s the biggest increase since October 2022. Investors might think the increase is a result of oil supply cuts from OPEC+ and the war in Ukraine, but one of the biggest contributors to the monthly increase was the federal carbon tax which increased on April 1 to $65 per tonne of emissions.
The first increase in annual inflation since June 2022 was also fueled in part by higher mortgage costs and rent. Mortgage costs jumped a whopping 28.5% year-over-year. That’s up from 23.9% in February and 26.4% in March. Inflation for rent resulted in a 6.1% increase.
Will the Bank of Canada Raise Interest Rates?
The surprising increase in inflation has many wondering if the Bank of Canada will be forced to resume raising its interest rates. While the annual inflation rate has been cut nearly in half since last June, getting inflation down to the Bank of Canada’s target of two percent has been more difficult than initially expected.
The central bank expects inflation to cool to around three percent this summer and will return to two percent in late 2024.
But will the central bank raise its rates when it meets next in late June? The one-month increase in inflation could be seen as a blimp, especially after months of cooling. That said, the central bank needs to do something to tame the hot labour market, which has resulted in near record-low unemployment.
To get inflation down to two percent the Canadian economy will need to pivot, which could mean a recession. It’s important to look at where the inflationary pressures are coming from though: food, housing, and gas. The last thing the Bank of Canada wants to do is make it more expensive for Canadians to live and eat and to see the housing market take a bigger hit.
That said, the odds of a rate hike in June have increased significantly to almost 1-in-3. At the start of May, the odds were around 1-in-50.
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