Inflation shock: Canada hikes interest rates after unexpectedly high consumer prices

Inflation data released Friday released a surprise uptick in prices in March, ending an eight-month lull in what had been one of the dearest consumer price index (CPI) periods since the inflation experiment began…

Inflation shock: Canada hikes interest rates after unexpectedly high consumer prices

Inflation data released Friday released a surprise uptick in prices in March, ending an eight-month lull in what had been one of the dearest consumer price index (CPI) periods since the inflation experiment began in the 1950s.

Average food prices jumped 1.5 percent last month, more than double the increase in January, in Canada, the latest data revealed. It’s an oddity considering that it’s Easter, a time when Canadians tend to fill up on pricier seasonal products.

The price leap means the Federal Reserve could have to raise interest rates again, adding to pressure on the central bank to do so. And it’s providing plenty of ammunition for critics such as Prime Minister Justin Trudeau, who are tired of the inflationary dog that does his bidding at the Bank of Canada.

With this first quarter showing higher-than-expected inflation data over half of the way through the fiscal year, interest rate predictions are that it will raise rates again by the end of this year, something Prime Minister Justin Trudeau — and past Prime Ministers Stephen Harper and Jean Chrétien — were hoping to avoid.

The central bank’s monetary policy report published in April 2017 projected 1.3 to 1.8 percent inflation in 2018 and 1.3 to 1.6 percent inflation in 2019. With a 1.5 percent increase in food prices for the same time period, economists now project 2019 inflation to be between 1.5 and 1.7 percent, meaning the inflation rate has yet to come down from last March.

As CBC reported last year, Mr. Trudeau’s previous administrations also had their own inflationary problems that ultimately resulted in the central bank hiking interest rates.

This will be the third time in two years that inflation has shown that it is rising faster than economists expected, only the end of the fiscal year further complicates the projection of future interest rate hikes.

Critics said the prime minister had no choice but to raise interest rates to combat inflation. Not only will the central bank have to increase the rate to counter inflation, the prime minister’s 2017 deficit projections and the fiscal cost of expanding the Canada Pension Plan were dependent on keeping interest rates at historic lows and record low interest rates.

In an interview with The Globe and Mail on Thursday, Mr. Trudeau said that inflation was an aspect of the global economy that his government had to adapt to.

“The key is we didn’t just come in and rush to adapt, as so many governments do in the face of these difficult circumstances,” he said. “We said we would do this gradually. We saw as a long-term objective we could get growth back to the kinds of rates we were accustomed to, but we would have to get back to the levels where we were in the 2000s. That was our goal.”

Mr. Trudeau also recognized that he would have no choice but to raise interest rates now to face the possibility of rising inflation on years to come.

“That’s why when you look at inflation there’s no sense looking at the last two years where we’ve been at or lower than the target we aim for,” he said. “Because what you’re really looking at is how are we seeing how does the inflation trend behave over the next year or two and three years into the future, and the answer is that’s how the Bank of Canada would make its decisions about interest rates.”

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