The "reopening effect" is to blame
Ahead of Statistics Canada’s report on inflation on Wednesday, economists are predicting inflation will reach at least 8% for June and the next few months amid what they call a “reopening effect.”
In May, the consumer price index hit 7.7% – nearly reaching a 40-year high. Prices for just about everything have soared as pandemic restrictions have eased, with energy and food taking the lead with a 35% and 10% year-on-year growth.
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Like many other economists, Derek Holt, head of capital markets economics at Scotiabank, attributed the much higher inflation rate to a “reopening effect.”
“Restrictions coming off the pandemic fell even further into June and that unleashed a whole wave of activity – more people dining, more people flying, more people getting out on a boat,” Holt told Global News.
By contrast, the average hourly wage has only gone up 5.2% from a year ago in June, leaving many Canadians financially worse off than they were during the pandemic. The Bank of Canada (BoC) pointed to the global pressures and supply chain issues for the soaring inflation, with only rises in interest rates to combat it.
“The bank is guarding against the risk that high inflation becomes entrenched because if it does, restoring price stability will require even higher interest rates, leading to a weaker economy,” it said in the BoC’s most recent monetary policy report.
Read more: Bank of Canada: was latest rate hike too aggressive?
The same scenario is unfolding in the US, where inflation climbed to another multi-decade high in June at 9.1%.
Statistics Canada will release the official inflation data for June on Wednesday, a week after the BoC raised the interest rate by a full percentage point to curb inflation. However, Holt offered a reminder that the impact of rate hikes would need some time to take effect, and could take more than six months to manifest.
