Wednesday, April 20, 2011

Inflation Spikes Sharply in March

Dan Sumner
Economist, ATB Financial
April 19, 2011

After more than two years of exceptionally low inflation and a strongly recovering economy over the past year, economists had predicted inflation was going pick up in Canada in 2011. However, few had expected that trend to start with the bang that it did in March. The year-over-year national rate of inflation jumped to 3.3% in March, much stronger than anticipated by the markets and the highest rate of increase since September 2008. In Alberta, price pressures also ramped up, with the provincial rate of inflation rising to 2.0% from 1.2% in February.
Driving inflation higher in both Canada and Alberta was a broad array of factors including higher food, clothing and gasoline prices. In fact, according to Statistics Canada, prices of fresh vegetables surged 15.6% in Alberta and 18.6% in Canada in March, thanks to supply shortages in Mexico and the southern US.
The core rate if inflation, which is used by the Bank of Canada in setting interest rates, also spiked, rising 1.7% year-over-year compared to only 0.9% in February. This rate of increase was also much stronger than anticipated by the markets and has solidified expectations for rate increases at either the bank’s May 31st or July 18th meeting.
Canadians have enjoyed the triple play of low inflation, low interest rates and a strong economy over the past year and although the economy is expected to remain solid, rates are only headed in one direction. If the mounting price pressures evident in March are the start of a longer trend, then rates could be moving higher and faster than previously anticipated.

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