Inflation rose to 4.1% in August, the highest since 2003

Canada’s consumer price index reached its highest level in almost two decades last month, as the price of almost everything rose sharply compared to the decline a year ago.

Statistics Canada reported on Wednesday that the inflation rate hit 4.1 percent in August, the highest level since 2003. This is an increase from 3.7 percent in July, which was already the highest in a decade.

Almost all types of goods or services were much more expensive in August than a year earlier, including protection (up 4.8 per cent), transport (8.7 per cent) and food (2.7 per cent).

The homeowners’ compensation cost index, which is related to the price of new homes, rose by 14 percent during the year to August. It is the sharpest jump in that measure since 1987.

Some of the biggest contributors to the jump were the sectors that Bank of Montreal economist Doug Porter noted were in full “reopening” mode from covid-19 suspensions including air travel, where ticket prices rose 37.5 percent and hotel fees increased by 12 percent. At the same time, petrol prices rose by 32 per cent compared with last year.

Motorist Ben Wood fills his pickup in Victoria on Tuesday and says that higher pump prices have a significant impact on his cost of living.

Look | It’s not your imagination – pump prices are soaring:

Motorist Ben Stone refills his pickup in Victoria and says that higher petrol prices have a real impact on his cost of living. 1:18

“I do not keep my tank as full as I would like, and try [not] to drive my car when I can, but it definitely adds a lot to the cost of living, he tells CBC as he fills $ 1.56 per gallon for regular gas, not the more expensive premium mix he usually goes for.

“Compared to the 90, 95 cents we were on a year or two ago, it’s a big hit for the wallet, of course.”

Supply chain issues that cause shortages and increase consumer prices for what is available are a major factor in many sectors of the economy, and there is perhaps no better example of this than in cars.

The price of new cars has risen by 7.2 percent in the past year, which is the fastest rate since 1994, Porter noted. An ongoing lack of semiconductor microchips limits how many cars car companies can turn out, which drives prices for what is available. The lack of cars drives up the prices of used ones as well, and leaves dealer lots mostly empty.

What exactly is ‘transient’ inflation?

Other parts of the rising inflation rate are due to the fact that COVID-19 created artificially low prices a year ago, which means that annual comparisons now look misleadingly large. That kind of inflation is what economists Porter describes as “transient” and the good news is that Porter says the comparisons a year ago would soon end.

But the figures in August indicate that the cost of living is basically rising with a quick cut.

“Part of the meaty increase was driven by reopening pressure, some by base effects … and some by – probably temporary – supply chain problems,” Porter said.

But “rising wage pressures, robust housing prices and fixed energy costs all suggest that inflation is not about to roll over quickly as these other short-term factors fade, “he added.

Economist Royce Mendes at CIBC has a similar view, saying in a note to customers that he believes that August’s record high inflation “may represent the peak of the mountain.”

In the first days of the pandemic, In fact, Canada’s inflation fell below zero for a while, in May and June 2020. But if the artificial step did not occur, the nail today would not look really so dramatic, says Mendes.

“Much of the increase over the past year only compensates for weakness early in the pandemic,” Mendes said. “With recent readings still indicating that much of the recent acceleration is transient and due to base effects, supply chain shortages and rising demand, central banks will stick to the script to keep interest rates pending until the end of next year.”

Food and drink too

Others, however, are not quite as convinced that conspicuous inflation is something that can be dismissed as artificial and nothing to worry about.

The price of used cars has soared, said Scotiabank economist Derek Holt, but Statistics Canada does not even track these figures in the inflation figure. And Canadians are well aware that the price of a home is rising, but so is renting. And the cost of things like alcohol, tobacco and recreational cannabis is rising – as is food.

After not being able to eat out much for most of a year, Canadians are becoming aware that the price of food and drink in restaurants is rising rapidly. (Lars Hagberg / The Canadian Press)

On a patio restaurant in downtown Toronto, diner Julie Eng is very aware of how much more it costs to go out and eat a piece after a better year of not being able to.

“Going out is more expensive, I have been used to eating at home, but now my food bills are rising higher and higher,” she told CBC News in an interview. “I have been home and eaten and bought food from the market is more expensive and everything goes up.”

Rising costs

Canada’s seasonally adjusted annual inflation rate has only been below the Bank of Canada’s target of two percent in five of the 18 months since the pandemic began, Holt said, so it’s hard to believe that higher costs for almost everything are temporary blips.

“The Bank of Canada has spent far too much time dismissing inflation as base-driven and transient after drastically underestimating inflation in its forecasts over the past year, despite knowing the base effects,” he said.

While Holt says that it is true that the pandemic lowered prices for a while, it was mostly just over a year ago.

“Some of this may be transient and some may reflect resilience and enduring drivers that we can debate. However, you can not throw this chart as a base effect driven because by design it is not compared to prices a year ago,” he said.

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