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The Globe and Mail

Bank of Canada feels the heat as consumer prices spike

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Inflation surges Canada's annual inflation rate surged in March to 3.3 per cent, far more than expected and the fastest pace since September 2008, The Globe and Mail's Tavia Grant reports today.

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That's up from 2.2 per cent in February, driven by sharply higher energy costs and, to a lesser extent, food prices. But even removing energy from the mix, consumer prices would still be up 2.4 per cent from a year ago, notably above the Bank of Canada's 2-per-cent target, Statistics Canada reported. Month over month, prices rose 0.8 per cent.

The central bank, which last week projected that inflation would indeed hit the 3-per-cent mark this quarter, is guided by the so-called core rate of inflation, which strips out volatile items such as energy. That rate climbed to 1.7 per cent from just 0.9 per cent.

"The broad-based price surge in March was much higher than expected right across the board, and raises some serious questions over just how much slack is left in the Canadian economy and just how much of a dampener the Canadian dollar really is on prices," said Douglas Porter, deputy chief economist at BMO Nesbitt Burns.

Consumers, of course, don't live by core prices. Here's the damage:

  • Energy prices climbed 12.8 per cent on an annual basis, gasoline almost 19 per cent.
  • Prices of food bought from stores rose 3.7 per cent, the fastest since August 2009. Overall food prices climbed 3.3 per cent, fresh vegetables by 18.6 per cent. Food prices have now increased for four straight months.
  • Shelter costs climbed 2.4 per cent.
  • Health and personal care products rose 2.6 per cent.
  • Costs for clothes and shoes jumped 0.9 per cent.

Some economists are still betting the Bank of Canada will hike rates in July, not sooner.

"The Bank of Canada must be feeling a little hot under the collar," said Emanuella Enenajor of CIBC World Markets.

"The data are surprising, and while it's only one month, they suggest that core inflationary pressures are finally catching up on the booming economic recovery in Canada," she added. "Although today's data raise the chance of a rate hike at the next Bank of Canada meeting, the BoC is likely to wait until July, not jumping the gun on monetary tightening due to one data point."

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The inflation "shocker," said RBC Dominion Securities strategists Mark Chandler and Kam Bath, is hard for the Bank of Canada to ignore.

"We see good reason for the BoC to change its bias statement as soon as the May meeting and continue to expect the first 25-basis-point hike to come in July," they said.

The unexpectedly higher inflation reading, and expecations for rate hikes, helped push up the Canadian dollar , noted Scotia Capital currency strategist Camilla Sutton.

"The BoC has sounded fairly cautious on tighter policy with a strong [Canadian dollar] however after today's inflation print it is clear that temporary effects that were subduing inflation are coming out of base effects and inflationary pressures in Canada are building," Ms. Sutton said.

(If you want to drown your sorrows, take some solace in the fact that booze prices were flat on the year, and actually down by 0.7 per cent from a month earlier.)

RBC down on lumber RBC Dominion Securities has downgraded the stocks of several forestry companies, given a drop in lumber prices and the impact of the stronger loonie.

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Those companies included Canfor Corp. , Interfor Ltd. and West Fraser Timber Co. .

All three were downgraded to "underpeform" by analyst Paul Quinn.

Goldman beats Street Goldman Sachs Group Inc. topped analysts expectations today, though with a drop in first-quarter profit.

Profit slipped to $2.74-billion (U.S.) or $1.56 a share, but still well above forecasts of 82 cents. And had the Wall Street giant not had to pay back a hefty sum to Warren Buffet, its per-share earnings would be $4.38.

"Generally improving market and economic conditions, coupled with our strong client franchise, produced solid results," said chief executive officer Lloyd Blankfein. "Looking ahead, we continue to see encouraging indications for economic activity globally."

J&J boosts guidance Consumer products giant Johnson & Johnson today boosted its outlook for the year, buoyed by a lower U.S. dollar and new products.

J&J earned $3.5-billion (U.S.) in the first quarter, or $1.25 a share, and forecast per-share earnings this year of $4.90 to $5. Sales climbed 3.5 per cent to $16.2-billion.

"Domestic sales declined 0.6 per cent, while international sales increased 7.3 per cent, reflecting operational growth of 4.1 per cent and a positve currency impact of 3.2 per cent," the company reported.

In Economy Lab today

Increased border security in the wake of the Sept. 11 attacks may be only a minor irritant in the context of a single border crossing, but a small cost multiplied by a large number of crossings can still end up being a very big number, Stephen Gordon writes.

In Personal Finance today

Rob Carrick explains what prospective home buyers need to consider about affordability.

Parents keen to improve their kids' financial literacy are tapping into a new, tough-love approach: If they want that allowance, they're going to have to get a job, create a budget, and maybe even sign a contract, Dianne Nice reports.

Versatile and ingenious, trusts can provide for education, split income and support children from previous marriages, Dianne Maley writes.

From today's Report on Business

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Report on Business News Editor

Michael Babad is a Report on Business editor and co-author of three business books. He has been with Report on Business for several years, and has also been a reporter and editor at The Toronto Star, The Financial Post and United Press International. His articles have appeared in major newspapers around the world. More

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