A rush for hairdressers, restaurants and travel accommodation means prices will continue to climb as the economy recovers from a year of stagnation.
Over the next few months, economists expect a trend in consumer spending that reflects the end of bottlenecks and fewer restrictions on mobility. Those changes are likely to start showing in the monthly inflation figures the federal government plans to release on Wednesday.
“We anticipate a shift in consumer purchasing from goods to services,” said Claire Fan, an economist at the Royal Bank of Canada.
“Over the past few months, we’ve seen commodities put upward pressure on prices. We now expect to see services take over as the engine of price growth. “
Since May, when the federal government announced its highest inflation figures in a decade, the country has opened up large sectors of the economy that have stood idly by during the COVID-19 pandemic. Today, hairdressers, foodservices, cleaners and transportation companies in Canada are facing an influx of demand that is poised to drive up the prices of services.
Rising prices are expected to keep Canada’s Consumer Price Index (CPI) above the Bank of Canada’s target inflation rate, experts say. The CPI hit 3.6 percent in May, marking the fastest annual growth since May 2011, while the overall cost of living jumped 10 percent from a year ago.
“It won’t be as dramatic as the month before, but it will still feel a bit hot,” said Avery Shenfeld, chief economist at CIBC World Markets Inc.
“Some prices will be high due to the lack of supply, and some goods and services that depended on the reopening of the economy could create a surge in demand and upward pressure on prices. “
It’s not just reopening that is driving consumer demand. Some industries have faced supply chain disruptions in recent months, forcing consumers to pay more for limited products. A global shortage of semiconductor chips – an integral part of automotive manufacturing – has caused car prices to rise dramatically in North America. Meanwhile, wildfires in British Columbia have blocked interprovincial timber production and agricultural shipments.
Meanwhile, demand is expected to slow for some products, including home furnishings or technology that have become staples for Canadians confined to their homes during the pandemic.
“There is a lot of uncertainty over the next two months as to how this will affect inflation,” Fan said. “Some prices will go up as others go down. “
In the United States, data released last week showed inflation soared 5.4% from a year ago, marking the largest month-over-month increase since the Great Recession , in large part due to delays in early reopening in various US states.
Contrary to rising figures from Americans, however, economists in Canada predict that the June CPI will decline slightly to between 3.2 and 3.4 percent while remaining above the Bank of Canada’s target range of 1 to 3 percent. So even if inflation remains high, it will not be as dramatic as in the United States.
The Bank of Canada, responsible for maintaining inflation, says the peak is not to be feared – the price hike is temporary and reflects a recovering economy. Tiff Macklem, the governor of the central bank, said inflation will eventually subside as consumers adjust to normal lives and return to their pre-pandemic spending habits.
The bank says it expects inflation to stay around 3% over the next few months before easing later in the year. Interest rates, meanwhile, have remained at a low of 0.25% as Ottawa tries to encourage borrowing and consumer spending.
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