TORONTO – Maybe we crowed too early, when Canada’s annual inflation rate fell to 2.8% in June for the first time since March 2021. According to economists, in fact, we must expect a new increase: both BMO and CIBC predict – according to Global News – that inflation will settle at 3.1% in July (official data are expected in the next few hours), largely due to the increase in petrol prices. On the other hand, the US saw a similar increase in inflation, with the annual rate climbing to 3.2%, up from 3.0% in June.
Douglas Porter, chief economist at BMO, says that although lower gasoline prices have driven the decline in inflation over the past year, rising prices could start to add to inflationary pressures. “Gasoline has gone very quickly from being a big drag on inflation to being near neutral to possibly boosting inflation, again, as early as the next report” Porter says.
And anyway, a rise in inflation in its July report would come as no surprise to the Bank of Canada, whose most recent forecasts show it expects inflation to hover around three percent next year before falling steadily to percent by mid-2025. Canada’s central bank said the new projections prompted its governing council to raise interest rates again in July by a quarter of a percentage point – the “key” interest rate in the Bank of Canada is now at 5.0%, its highest since 2001.
Meanwhile, the unemployment rate is on the rise: In three months, it jumped from 5.0 to 5.5 percent, and according to Porter, “it’s a tough decision to keep raising interest rates when the unemployment rate is falling.” It would be unwise to continue raising interest rates with the kind of rise we’ve seen in the unemployment rate in recent months.”
While many economists share Porter’s expectation that interest rates won’t continue to rise, CIBC executive director of economics Andrew Grantham says he expects another hike in interest rates instead. “One of the reasons our current forecasts actually predict another interest rate hike by the Bank of Canada is that the Bank appears to be risk-taking about doing too much,” Grantham said. “They would rather get inflation back to target sooner rather than later.”
The Bank of Canada’s next decision on interest rates is scheduled for September 6: anyone with a mortgage or loan will arrive at that date with bated breath.
Pic by Tara Clark from Unsplash