Spiking inflation: Tempest in a teapot or actual storm?
The national inflation rate hit 3.4% in April and 3.6% in May
By Rob Roach, ATB Economics 16 June 2021 2 min read
In the years leading up to the pandemic, the inflation rate was exactly what it should be: pretty boring. From 2014 to 2019, Canada’s monthly Consumer Price Index (CPI) was outside the Bank of Canada’s target range of 1% to 3% on only three occasions.
Things were a little more dramatic in Alberta due to the effects of the deep recession we experienced in 2015 and 2016 with the provincial inflation rate outside the target range 14 times in 72 months.
The rate has been particularly stable on an annual basis, with the change in Alberta’s annual CPI staying within the Bank of Canada’s target range every year since 2010. The national inflation rate dipped below the Bank’s range in 2013 when it was 0.9% and last year when it was 0.7%.
Measures of “core” inflation that edit out some of the more volatile components of the CPI were even more stable.
Nice and boring.
The pandemic has, however, created some unwanted excitement with the national inflation rate hitting 3.4% in April and 3.6% in May. (In Alberta, it was 3.3% and 3.1%.)
The Bank of Canada and the U.S. Federal Reserve think the rise in the CPI is a blip that will work itself out relatively soon. Inflation was suppressed last year by the pandemic whereas now it’s being spurred by the reopening of economies, temporary supply chain disruptions, pent-up consumer demand and ongoing government stimulus. By the end of the year or thereabouts, these shocks will be over and inflation will resume its more boring trajectory.
Others see it differently and are ringing alarm bells about potentially runaway inflation. With only two months of data in hand, this seems a bit premature, but those buying lumber, gasoline or a home might beg to differ.
Our sense at ATB Economics is that the Bank of Canada has the higher ground in this debate with inflation falling back into the 1% to 3% range during the second half of this year. With that said, we don’t know what “normally” happens to contemporary economies after a global pandemic, so both possibilities need to be considered until we get more data.
Answer to the previous trivia question: According to the U.S. website thehousedesigners.com and assuming mature pines with a height of 80 feet and a diameter of 2 feet, it takes roughly 22 trees to produce the lumber to frame a typical house.
Today’s trivia question: According to Uber Eats, a Big Mac by itself sells for $5.69 before GST. How much would the same Big Mac cost if we erase four decades of inflation and go back to 1980?