Thanks to the fact that commodity prices have cooled recently and Greece had stolen the spotlight, the market had become less concerned with inflation. But, the monthly price report released this morning may bring inflation concerns in Canada back to the forefront.
Canadian headline inflation rose for the fourth consecutive month in May to 3.7%. This is the highest level for headline inflation since March 2003 and is up substantially from just a few short months ago.
Interestingly, in Alberta inflation actually moved in the opposite direction, with prices rising by 2.8% compared to a year ago, after rising by 3.0% in April. The reason behind lower inflation in Alberta is smaller price increases for a broad range of items including: food, clothing, household operations and furnishings (telephone, internet, furniture etc.) and transportation (purchasing a car, gasoline etc.).
The Bank of Canada’s core rate of inflation, which is used by the central bank to set interest rates, also rose handily in May to 1.8%. This is interesting because over the past month, expectations for rate hikes in Canada had been pushed back by the markets. Some forecasters predicted the central bank wouldn’t raise rates at all this year. However, this morning’s inflation report is likely to put rate hikes for this fall back in the realm of possibility.
Inflation has been on an interesting trend recently, and although temporary factors (such as seasonality) are partly to blame for higher inflation in May, price pressures are clearly mounting. If inflation does not begin to subside over the next couple months, look for the Canadian borrowing costs to rise and Canadian dollar to appreciate.*
*Courtesy of Dan Sumner, Economist, ATB Financial