Canadian inflation hits a new three-decade high with pressure to raise interest rates intensifying

Canadian inflation hit a new three-decade high in January, heaping more pressure on the Bank of Canada to raise interest rates for the first time since the COVID-19 crisis started.

The Consumer Price Index rose 5.1 per cent in January from a year earlier, marking the first time the inflation rate has surpassed 5 per cent since 1991, Statistics Canada said Wednesday. In December, annual inflation was 4.8 per cent. January was the 10th consecutive month that inflation has exceeded the Bank of Canada’s target range of 1 per cent to 3 per cent.

After holding its benchmark interest rate at 0.25 per cent in January, the Bank of Canada is widely expected to begin its hiking cycle at the next rate decision on March 2 in an effort to quell inflation. Traders are pricing in at least six rate hikes this year, which would take the bank’s policy rate to 1.75 per cent, equal to where it was at the outset of the pandemic.

Canadians are facing steep price increases on several fronts.

Shelter costs rose 6.2 per cent in January, the quickest annual pace since 1990. The homeowners’ replacement cost index – which is tied to the price of new homes – rose 13.5 per cent, propelled by higher costs of lumber and other building materials.

Food is another troublesome area. Grocery prices rose 6.5 per cent in January on an annual basis, quickening from December’s 5.7-per-cent pace. Fresh or frozen beef jumped 13 per cent, margarine by 16.5 per cent and fresh fruit by 8.2 per cent. Statscan pointed to inclement weather and higher shipping costs as some of the reasons for pricier food.

Gasoline rose 4.8 per cent in the month of January alone, and with Canadians seeing record prices at the pumps, that’s likely an area of further inflationary pressure.

“With energy prices continuing to rise, inflation is set to accelerate even further and is unlikely to materially slow down before April,” Royce Mendes, head of macro strategy at Desjardins Securities, wrote in a note to clients.

The average of the Bank of Canada’s core measures of annual inflation – which strip out extreme price swings and give a better sense of underlying trends – rose to 3.2 per cent from 3 per cent, the highest since 1991.