With Canada’s annual inflation rate seeing a record increase last month, some economists say certain sectors will eventually level off as the economy recovers from COVID-19, while others might continue to see increased demand — and prices — for the foreseeable future.
Canada saw its largest ever annual inflation rate spike in a decade, with a 3.6-per cent increase in May.
The spike, reported by Statistics Canada Wednesday, outstripped the previous year-over-year record of 3.4 per cent seen just two months earlier in April.
Several experts said last month’s annual inflation rate, which rose at a rate not seen since 2011, was in large part due to its comparison to that of the low prices spurred on at the start of the COVID-19 pandemic last year, which saw several segments of the economy devastated.
While the economy looks to rebound and normalize alongside plans from several provinces to reopen, some economists have pointed to other drivers that are helping push that rate of inflation to record levels.
Dominique Lapointe, senior economist at Laurentian Bank Securities, said that people are now buying a lot of goods and products helping to drive that inflation. It’s something he wasn’t expecting a year ago.
“Whether it’s electronics, cars, they all want to do things that they couldn’t do before,” said Lapointe.
While prices in some sectors are now beginning to surge for consumers across the board, Lapointe said that most products would eventually “normalize” in the coming months or so.
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During the pandemic, Lapointe said that the gas, retail and travel industries all saw a dramatic drop in demand — and price — over the last year.
“Gasoline prices, for example, collapsed last year and now they’re back up to where they were prior to the pandemic and that creates a lot inflation on paper,” he said, adding that 40 per cent of that 3.6-per cent inflation rate alone came from gasoline prices.
The same would also go for clothing stores and airline tickets as people begin to be able to visit stores again and travel, he said, though those inflation rates would most likely slow down heading into 2022.
What has Lapointe worried about the most over news of the inflation is the stress being felt by several sectors in the global supply chain — namely that of lumber and microprocessors.
Several industries could still be exacerbating inflation rates even after the prices of other products level out, he said.
Industries like housing and car manufacturing are have now been feeling this demand because of the high price of lumber and lack of microprocessors, respectively.
“We can’t grow a tree within a year, so that might stay for a while,” he said. “Same thing for microprocessors. We don’t have any capacity in the world, there are only three companies that are building microchips and they’re at full capacity now.”
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“As people demand more of those products, the supply chain is going to react to that.”
According to CIBC’s deputy chief economist of world markets, Benajmin Tal, the area inflation rates are going to hit hard will actually be that of the service industry, not consumer goods.
“So far, all the damage in the economy was in the service sector because when it comes to goods, you press the button and you get your exercise bike — no issue,” said Tal.
“When we start opening up, you will see a significant increase in demand for services — and that’s where we expect inflation to be. That’s exactly what we see [happening] in the U.S.”
Tal said that the falling prices in the service industry would eventually “reverse itself” as the economy reopens, and that we can expect higher inflation there in the coming months as well.
Another factor that will lead to higher inflation down road will also be due to consumers’ willingness to accept higher prices, Tal said.
“Why? Because the consumer is dying to spend. There is a huge amount of pent up demand in the system — we are sitting on roughly 100 billion dollars of excess cash,” he said.
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Finally, while Tal said that there remains the assumption of inflation rates settling back to normal, whether or not it would actually do so is anyone’s guess.
Whether interest rates would have to be raised to keep up with the higher prices in the future, Tal said that it’s something both the Bank of Canada and the U.S. Federal Reserve will have to face down the road.
“At the end of the day, when it comes to inflation, we have to recognize that nobody knows where [it will] be six months from now.”
— With files from Anne Gaviola and Kieron O’Dea
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