INSTANT VIEW Canada annual inflation gallops to near 40-year high of 7.7% in May

Canada’s annual inflation rate accelerated to 7.7% in May, the highest since January 1983, on gasoline prices, as well as services like hotels and restaurants, Statistics Canada said on Wednesday.

Analysts polled by Reuters had expected the annual rate to rise to 7.4% in May from 6.8% in April.

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Market reaction: CAD/

COMMENTARY

ANDREW KELVIN, CHIEF CANADA STRATEGIST AT TD SECURITIES

“It’s a bit alarming, particularly the breadth of inflation we’re seeing, I think it really reinforces that Bank of Canada needs to take drastic actions to bring inflation under control. I think it explains why they have sounded suddenly so alarmed about the inflation outlook over the last three weeks or so. And it reinforces our expectation for the Bank of Canada with rates by 75 basis points at its next meeting.”

“I don’t know if there will be another 75-basis-point rate hike (after) July. But certainly we do expect additional 50-basis-point moves. And if we’re already looking for 50-basis-point moves, it’s a fine line between arguing for 50 and arguing for 75. So while it’s not our expectation that we will see 75-basis-point moves beyond July, certainly you can’t rule it out, particularly if CPI inflation continues to move higher in the third quarter.”

JAY ZHAO-MURRAY, MARKET ANALYST AT MONEX CANADA
“That’s a very scary print for (Bank of Canada Governor) Tiff Macklem and the rest of the Bank of Canada’s governing council, as the continued momentum in price pressures will become increasingly entrenched in people’s inflation expectations. We think the debate about whether the BoC will follow the Fed and deliver 75 bps (basis points) is now over. The Bank will need to deliver at least 75 bps to reassert to markets and Canadians that it has the fortitude to deliver sufficiently substantive monetary tightening to wrestle inflation down.”

DOUG PORTER, CHIEF ECONOMIST AT BMO CAPITAL MARKETS
“Clearly, this is well north of most expectations. Way beyond what the Bank of Canada was expecting in the second quarter and what’s particularly notable, it wasn’t just the 12% rise in gasoline prices, which was well known, it’s the fact that every measure of core took a big step up from upwardly revised levels … It is fairly clear that the pressures are spreading out and risking becoming much more entrenched.”

“It certainly seems extremely likely at this time that the Bank of Canada will fall in the Fed’s footsteps (and hike interest rates by 75 basis points next month).”

JIMMY JEAN, CHIEF ECONOMIST AT DESJARDINS GROUP
“We’re seeing a pickup in clothing that had been a dormant area. So with the reopening, people are buying more clothes, and that reflects in the report, also, we see a good pickup in the household operations. So you see acceleration, just about everywhere. This is a story of broad-based inflation. So it’s clear that central banks have been losing sleep over inflation, but if anything with this report, they’ll need to renew their sleeping-pill prescriptions, because this is still red hot.”

“Transitory is dead and buried now… We’ve started to see wage growth pick up quite a bit. And we know that, given these high job vacancies – we saw that report yesterday – it is only likely to continue. So we’re really in persistent mode. And that’s what has central banks on high alert. That’s why the Fed decided to move 75 basis points. And we think the Bank of Canada will be doing the same.”

“We have the beginnings of a housing market correction. So we see prices starting to fall, but I think we’re still too much in the early innings. And the other thing is that, in terms of affordability, it doesn’t really fix anything in the near term, because we’re going to see more pressure in rent. So you know, and that’s a another factor that might be persistent. So……we’re not seeing those signs yet that inflation is peaking… We’re continuing to see that those overshoots versus the bank’s forecast versus anybody’s forecast… The danger here, of course, is that the central banks overdo it and we have a recession as a result.”