Inflation is a big topic of conversation for the Bank of Canada. The Canadian economy struggles following the aftereffects of the Covid-19 pandemic. Statistics Canada has confirmed the Canadian inflation rate had reached 3.1% in June. Shelter and transportation prices were found to have risen while those for food, women’s clothing, mortgages, and recreation slowed down. Though it is a reduction on the decade-high of 3.6% reported in May, this figure remains above the Bank of Canada’s 1-3% limit range. Policymakers predict inflationary figures to rise as high as 3.9% in the third quarter but insist this will be a short-term effect.
Prices for goods and services are likely to increase due to a number of factors such as production shortages and a lack of supply for goods and services due to raw material shortages. Additionally, there is increased demand for goods and services as many Canadians were able to save an extra average of $5,800 on average per person from decreased spending during the lockdown.
The bank of Canada commits to a 2% inflation target, as this percentage increase is stable and good for the economy because businesses and people feel confident in knowing what has to come and can properly plan for it and make long-term financial plans. This results in a stronger economy with higher rates of employment.
Bank of Canada (BOC) Governor, Tiff Macklem, has urged people not to overreact to what he terms temporary price increases. He assured the public that the government would keep the cost of living under control as the economy reopens. The BOC has attributed this effect to supply chain disruptions caused by the pandemic and the normalizing of the prices on certain commodities that plummeted during initial lockdowns. Its researchers are recommending that inflation temporarily run above the target range as the economy recovers from recession.
The BOC is not too concerned with the rising inflation rate as they deem it expected due to recovery from Covid-19 but will be keeping a close watch moving forward. Although this rise is expected, Philip Cross, a senior economist at the MacDonald-Laurier Institute has said, “If this kind of activity carries on into next year, the bank has the tools to reign in inflation, and they may have to use them earlier than they think.”
In an opinion piece published in the Financial Post, Macklem stated that more disturbances and sharp price movements could be expected as activities normalised. He added that inflation figures could be expected to return within the target range next year. Macklem also noted that the government was committed to keeping the policy interest rate low until the economy recovered. A situation not likely to happen until mid-2022 when businesses would have worked through the temporary factors and more people that lost their jobs due to the pandemic re-joined the workforce.
Statistics Canada has said that the figures released were a comparison with prices from the same period last year. Fuel price changes do appear more extreme thanks to the decline endured when the pandemic began. The report indicates a 32% rise in gasoline prices in June 2021 compared to in June 2020 when prices had just started recovering. Excluding fuel prices alone would have given an inflation rate of about 2.2%. The fall in cellular service pricing was a result of various promotions being run across the industry that offered lower prices on phone plans and bonus data.
TD Bank economist, Sri Thanabalasingam, has warned consumers to expect higher transport and gasoline prices. He added that more consumer prices were likely to go up as business faced higher costs in everything from supplies to labour, and would be forced to pass on the expense.