Insights & Analysis

July 2, 2021

Weekly EconMinute—July 2, 2021

In this week’s EconMinute, we’re talking about inflation.

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The Consumer Price Index (CPI) has been dominating headlines in recent weeks as Canada’s inflation rate hit a ten-year high in May.

The Bank of Canada works to contain year-over-year growth in the CPI to within a 1% to 3% band. However, inflation has been accelerating since January, reaching 3.6% in May. This has prompted concerns about runaway price growth, which could lead the central bank to raise interest rates sooner than expected, potentially snuffing out Canada’s post-COVID economic recovery before it even begins.

However, while the risk of persistent inflation cannot be dismissed, there are several reasons why this could be a temporary phenomenon

  • Rising oil prices are a major contributor to current inflation, partly because of recent growth and partly because of how low they were one year ago. While inflation was 3.6% in May, energy prices were up 26%.
  • Removing energy, Canada’s inflation rate in May was 2.2%, only slightly higher than it was pre-COVID.
  • Another factor is that inflation tumbled one year ago when COVID lockdowns were first implemented. The recent spike can be partly attributed to pent-up demand as economies re-open, and the fact that that growth is on a weak base.
  • The other recent driver of inflation is shelter costs, especially home ownership and utilities. After falling slightly one year ago, shelter costs are up 4.2% compared to a year ago.

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