This article originally appeared in the Financial Post. Below is an excerpt from the article.
By Philip Cross, August 30, 2023
Statistics Canada’s latest reading of consumer prices shows an upturn in July to 3.3 per cent from an annual rate of 2.9 per cent in June. This increase reflects the Bank of Canada’s admission in its July Monetary Policy Report that inflation is “more persistent than originally thought.” The big questions now are how much higher prices will rise in the second half of this year and whether the Bank will raise interest rates further.
It was entirely predictable that inflation would accelerate in the second half of 2023. This is because of what statisticians call the “base effect” from comparing gasoline prices today to their levels of a year ago. In the immediate aftermath of Russia’s invasion of Ukraine in February 2022, gas prices in Canada soared past $2 a litre. As the western world adjusted to the effects of its own embargo of Russian oil, however, prices gradually retreated. By this spring, gas prices were exerting downward pressure on the CPI because they were being compared to the record levels of a year earlier. By July, however, prices were above their year-ago level as world oil prices rebounded following OPEC’s announcement of production cuts and, in this country, higher federal carbon taxes continued to raise prices at the pump.
In July, the Bank of Canada predicted base effects would push up inflation in the second half of this year. It expected persistently high “core” inflation, which removes volatile items like food and energy from the CPI, to push headline inflation back to four per cent or so. It also noted inflationary pressures were widespread, with over half the components of the CPI increasing by five per cent or more. And, finally, it expressed concern that returning inflation to its target rate of two per cent would be increasingly difficult as wage increases exceeding four per cent became entrenched in a tight labour market.