Inflation continued to climb in December and ended 2021 at a 30-year high, which is increasing pressure on the Bank of Canada and prompting several banks to predict a rebound in interest rates as early as next week. .
Posted at 6:00 a.m.
Some economists even believe that the central bank could raise its key rate six times this year to quell inflation, which would be unprecedented.
At the National Bank, economists predict five hikes, which would take the key rate from 0.25% currently to 1.5% at the end of 2022.
The central bank is behind schedule, says National Bank economist Kyle Dahms. “Prices continue to rise, we are at full employment and the housing market is in turmoil,” he illustrates.
The first hike could come as early as next week, Jan. 26, when the Bank of Canada releases its first monetary policy report of the year, a growing number of economists believe. Some argue that it could be followed by five others.
Watch out, says Hendrix Vachon, economist at Desjardins. Do not believe that a rapid and sustained increase in interest rates could work miracles to combat inflation caused by insufficient supply.
The production of goods and services in several countries remains constrained by the effects of the pandemic and health measures. Raising interest rates in this environment would not help solve supply-side problems.
Hendrix Vachon, economist at Desjardins
“The best remedy would be a favorable evolution of the pandemic with the withdrawal of health measures”, according to him. Desjardins is planning three rate hikes this year, the first in March.
At the Laurentian Bank, chief economist Sébastien Lavoie is among those who predict a 25 basis point hike in the key rate as of next week, followed by another in March.
The consumer resists
Every country in the world is currently experiencing the effects of the pandemic on consumer prices. Supply chains are disrupted, factories close or idle, and labor shortages emerge or grow.
Boosted by government assistance, consumers continued to spend as before, and even more in certain product categories, such as cars, household appliances and electronics.
Prices are up 4.8% over the past year, while wages have risen 2.6% over the same period. “Prices have risen faster than wages and the purchasing power of Canadians has declined,” says Statistics Canada.
From an accounting point of view, it is true that the purchasing power of Canadians has diminished, specifies Kyle Dahms. In fact, many people have increased their savings during the pandemic and the value of their homes and stock portfolios have also increased, so rising prices hurt less, he says.
However, everyone has noticed the rise in food prices, which affects less well-off households more.
An acceleration
Inflation measured by the Consumer Price Index (CPI) accelerated during the second half of 2021, reports Statistics Canada, reaching the rate of 4.8% in December.
For the year as a whole, the CPI is up 3.4%. It was energy prices that drove prices higher in 2021, after falling precipitously in 2020. Excluding energy, the average rise is 2.4%.
Other notable increases are due to housing (+3.9%), cars (+5.1%) and furniture (+7.3%). Consumers who shopped around for the fridges saw their price jump 9.6%, according to Statistics Canada.
The cost of the grocery basket is 2.2% higher. This is less than in 2020, when the increase was 2.4%. The foods that make up breakfast, eggs, milk, butter, all cost more.
There were also some price cuts. Clothing and footwear fell for the second year in a row in 2021. After being very popular at the start of the pandemic, sports and fitness equipment fell in demand and fell in price.
Prices increased across Canada in 2021, but Western Canada was less affected. Quebec recorded one of the highest CPI increases in Canada, at 3.8%, compared to 3.5% for Ontario.