Forward Guidance: Firming Inflation Pressures to Intensify with Reopening Activity

We expect next week’s Canadian inflation report to show that the main price rise jumped to 3.3% in April, partly reflecting lower bases last year as the economy closed. Energy prices in particular suppressed a downturn last spring, but recovered so much that gasoline prices rose 60% year-on-year in April. The Bank of Canada will look at temporary energy price swings, but signs of emerging underlying inflationary pressures will be more heeded. And we expect to see some of that in the report next week.

Wider measures of entry prices have climbed in recent months. Raw material prices have risen for some products, and companies in the Canadian industrial sector have delivered those costs with industrial product prices also sharply. However, it usually takes time for higher input costs to operate through production chains and into consumers ’purchase prices. So far these price pressures have appeared more in Canadian export prices than domestic prices, with the exception of a handful of exceptions such as much higher timber prices. A stronger Canadian dollar probably offset some short-term cost pressure on traders. The price of imports of consumer goods fell by almost 7% from a year ago in March.

Another concern is how quickly domestic demand could rebound after the economy begins to reopen. Some services were largely unavailable over the past year, and the price at which those services reopen could have a significant short-term impact on inflation measures. In Canada, COVID retention resources were still widely available in April, but prices in the U.S. rose sharply as the economy began to reopen. We expect underlying inflationary pressures in Canada to consolidate as the year progresses, supported by a rapid recovery in consumer demand.

Pre-week data viewing:

• Canadian retail trade will increase in March as regions relax restraint resources. We look at re-imposed retention measures to ease performance in April. Our internal card spending data tracks a 4% decline in retail sales for the month.
• After exceptionally strong performance in previous months early results showed Canadian home sales in major cities moderated in April. The nationwide report is expected to show that sales declined although remained at high levels in April.
• Active COVID cases have declined in most regions in Canada, but some are still struggling with controlling the virus. Vaccine distribution, however, has grown with more than 41% of Canadians receiving at least their first dose.