Market Wire - Prices Rise More Than Forecast, Keeping Pressure on Bank of Canada

Canadian price growth remained extremely elevated last month, making a 75-basis point interest rate increase highly likely at the Bank of Canada’s July meeting. Data released by Statistics Canada this morning showed the Consumer Price Index climbed 7.7 percent on a year-over-year basis in April. This beat last month’s increase, again marking the fastest increase since January 1991, when the Mulroney government implemented its Goods and Services Tax. Prices rose 1.4 percent month-over-month, after a 0.6 percent gain in April. 

Markets expected headline prices to rise 7.4 percent, with core prices seen increasing 5.9 percent. The Canadian dollar jumped on the news.

Gasoline prices climbed sharply, up 12 percent month-over-month after a modest 0.7 percent gain in April. 

Shelter costs rose 7.4% year over year, staying level with last month as the fastest pace since June 1983. Food prices were up 8.8 percent relative to last year. 

Core inflation, computed as the average of the three price measures preferred by the Bank of Canada (trim, median, and common), increased an annualized 4.73 percent - the highest in at least three decades. Core measures strip out highly-volatile categories, and are often used to develop a better understanding of price pressures in the underlying economy.

Soaring inflation rates do not appear to be crimping household spending patterns - yesterday’s retail sales report showed receipts rising 0.9 percent in April and 1.6 percent in May. 

Investors expect the Bank of Canada to hike benchmark interest rates by a full two percent by the end of the year, with a jumbo-sized 75-basis point move essentially fully priced in for the July meeting.