On Wednesday, May 18, Statistics Canada released April’s inflation report with a year-over-year increase of 6.8%, increasing marginally from the 6.7% recorded in March 2022. This new 31-year high deviated from economists' expectations of a slight decrease from last month. This begs the question, are we seeing the peak of this challenging inflationary environment or will it continue to edge higher?

The main upward contributors month-over-month include:

·     Natural Gas (6.3%) 

·     Owned Accommodation Expenses (2%)

·     Homeowners’ Maintenance Costs (2.6%)

·     Food Purchased from Restaurants (1.5%)

The main contributors to the one-month downward change include: 

·     Travel Tours (-12.6%)

·     Digital Media (-19.1%)

·     Child Care and Housekeeping Services (-4.2%)

·     Gasoline (-0.7%)

A decrease in gasoline may come as a surprise to those who have visited the pump lately, but keep in mind this is down from the March peak. Unfortunately, in many places across Canada, we have seen new record prices in May, which will be reflected in next month's release. Year-over-year, gasoline is still the main upward contributor to CPI (36.3%), from April 2021.

Providing some solace for potential home buyers, the Canadian Real Estate Association reported the first month-over-month decline in home prices since April 2020. Although a mere 0.6% decrease, this could be a sign of what is to come, with national home sales dropping 12.6% month-over-month. As a reference, the year-over-year home price index has risen by 23.8%.

While economists’ expectations indicate that inflation may have peaked (6.8%) in this new era, the current numbers are well above the Bank of Canada’s CPI target (2%). If rates stay elevated for a prolonged period, in a stagflation-like scenario, the power of compounding will quickly start to put further pressure on the average consumer. While average hourly wages for employees increased 3.3% year-over-year, the gap between wage growth and inflation continues to increase. 

Many inflation tailwinds remain in play driving continued uncertainty. The full economic extent of the Russian war with Ukraine is not yet known. There is strong potential that the true impact of fertilizer and potash shortages on food prices has not yet been fully realized. Supply chain issues with Chinese exports are ongoing due to China’s harsh “Covid-zero” policy. Earlier this week, India banned wheat exports, causing futures prices to jump 6% overnight. Last month, Indonesia suspended its exports of palm oil which accounts for 56% of the global supply. Although the average North American consumer won't be going hungry, it is worth noting food banks across Canada are seeing demand quickly increase. 

The Bank of Canada will be watching these numbers closely leading up to its next meeting on June 1, while also taking into consideration other economic indicators. Currently, the market is pricing in another 0.5% interest rate hike but the BoC will have to proceed with caution, given recent signs of reduced consumer confidence. They have to execute a delicate balancing act if they wish to curtail inflation while keeping a healthy economy

If you have any questions about today’s Market Update, you can call us at 604-643-0101 or email cashgroup@cgf.com