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  • Writer's pictureanalysiswatch

Title: High inflation expectations raise stakes for Bank of Canada ahead of CPI data

Jun 20, 2022 07:01AM ET

By: AnalysisWatch

The risk of inflation taking hold in the Canadian economy is growing, analysts say, as rising prices for gasoline and other unmanageable consumer goods undermine the Bank of Canada's efforts to keep price-increase expectations in check.

Once inflation takes hold in an economy, it generally becomes more difficult to bring it under control without triggering a slowdown or even a recession.

Canada's consumer price index for May, to be released Wednesday and containing new basket weights unlikely to have much impact, is expected to show inflation rising above April's three-decade peak of 6.8%.

What central banks fear is a situation where price increases become self-fulfilling—the expectation of higher prices causes people to increase their wage demands and accelerate their purchases, leading to further price increases.

The Bank of Canada is fighting a "battle" to control inflation expectations, according to Derek Holt, head of capital markets economics at Scotiabank, who forecasts a 7.8% growth rate in the consumer price index for May.

Much of the price increase is due to supply shortages related to the COVID-19 pandemic and the war in Ukraine. However, as inflation continues, expectations that price pressures will persist have increased.

A May survey by the Conference Board of Canada showed that 78% of Canadians expect inflation to be above the BoC's 2% target over the next three years, up from 77% in April.

Investors have taken note and are betting that the central bank will hike rates the same as the Federal Reserve by three-quarter percentage points at its next meeting on July 13, which would be the largest hike in 24 years.

The threat of unanchored inflation expectations comes as Canadian gasoline prices rose to a record high of C $2.15 per liter in June.

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