Bank of Canada Governor Mark CarneyAdrian Wyld
Patti Croft is recently retired as chief economist, RBC Global Asset Management, with 30 years of experience on Bay Street working as an economist and global asset allocation strategist.
Canada's inflation rate jumped to its highest rate in two years in October, rising 2.4 per cent on an annual basis compared to 1.9 per cent in September. About half of the increase was attributable to higher gasoline prices but price increases were broadly based, with increases in every major category with the exception of mortgage debt servicing costs.
The Bank of Canada pays particular attention to the core or underlying rate of inflation. Core inflation was much higher than expected, jumping 0.4 per cent on the month, up 1.8 per cent year over year. The Bank's target for core inflation in the fourth quarter is 1.6 per cent so for the first time in a long time, the Bank may have erred on the low side in predicting inflation.
The increase in inflation in October was somewhat surprising as the Canadian dollar traded close to parity last month, presumably helping to dampen inflation for imported goods. But Canadians paid higher prices for everything from home and auto insurance, clothing, cars and textbooks.
The disparity in inflation across the provinces was notable - Ontario registered the highest rate of inflation with prices 3.4 per cent above year ago levels while Alberta sat at the other end of the spectrum, with prices up just 1.2 per cent.
Inflation is a critical indicator at this stage of the business cycle - inflationary pressures, or the lack thereof, are a key gauge of underlying economic health. What we are seeing globally are vastly different readings on inflation. In the U.S., the core rate of inflation in October stood at just 0.6 per cent, the lowest reading on records that date back to 1957. This highlights the anaemic pace of growth and enormous economic slack with the unemployment rate still stuck at close to 10 per cent.
At the same time China and other emerging market economies are struggling to rein in inflation, led by soaring food prices. China's CPI rose 4.4 per cent in October, boosted by a 10 per cent surge in food prices, prompting the government to sell reserves of goods such as grain and cooking oil.
This is a world of fire and ice with Canada stuck in the slush. Canada's inflation rate surprised on the upside in October but Canadians need not fear interest rate hikes anytime soon. The Bank of Canada has correctly erred on the side of caution, pausing with interest rates at just 1 per cent.
The continued strength of the Canadian dollar will dampen inflationary pressures in Canada and it is far too soon to tell whether the U.S. economy is firmly on the road to recovery or not. Inflation is still an emerging market issue - developed economies (with the exception of Canada) have far more to fear from deflation at this juncture.