We’ve all seen the news that April’s inflation figure rose to 4.4% from March’s 4.3%. The increase marked the first in almost a year, as inflation had been either falling or stagnant since June of 2022. The increase was tiny, but it bucked a positive trend – so what happened? Frist off, grocery and food prices continue to pose problems for Canadian consumers. Prices for food went up 9.1% in the year up to April, a slowdown from the rate up to March, but still uncomfortably high. Gas prices rose 6.3% in April, the biggest increase since October of 2022. The CBC noted that there were a number of geopolitical and macroeconomic reasons for the rise in gas prices, but also acknowledged that the increase to the carbon tax was a reason. April 1 marked an increase to the carbon tax to $65 a tonne. The carbon tax increase added three cents a litre to the cost of gas. In total, the carbon tax costs consumers 14 cents a litre when they fill up. Average gas prices hit $1.60 nationally, up from $1.50 in March. The all-time high to the gas price was reached in June of 2022, when it reached $2.07. Gas prices are lowest in Edmonton, at around $1.40, and highest in Vancouver, where they hover just under $1.90.

The continued pace of price increases and the ongoing robustness of the labour market has analysts pointing to a good chance that rates will go up again at the BOC’s next decision point. The bottom line is that basic everyday costs are continuing to go up too quickly, despite all the progress that’s been made in lowering the headline inflation rate. Bank of Canada Governor Tiff Macklem, in a press conference following the release of the central bank’s annual financial system review, acknowledged that April’s inflation report exceeded expectations.

However, Macklem asserted that despite an increase in energy prices and persistent food inflation, the latest inflation report indicated signs of progress. He highlighted that the bank’s preferred core inflation measures continued to decline on a year-over-year basis in April, and there were indications of easing in the services sector.

The Bank of Canada has maintained its key rate in two consecutive decisions after an aggressive hiking cycle that saw the benchmark rate climb by 4.25 percentage points over the course of a year. Policymakers have emphasized that the pause is contingent upon inflation returning to the central bank’s target of two percent, leaving the possibility of additional rate hikes open “if necessary.” When asked about the impact of the recent inflationary uptick on the bank’s monetary policy plans, Macklem refrained from providing a direct response and stated that the governing council would consider the inflation data along with other economic inputs and make a decision at their next announcement on June 7.

Macklem expressed overall encouragement about the progress made in addressing inflation concerns and stated that the central bank anticipates a continued easing of price pressures.

“We are seeing the positive effects of higher interest rates, as inflation is gradually receding,” Macklem stated on Thursday. Although he declined to comment on the timing or likelihood of further rate hikes, he reiterated that it is premature to discuss reducing interest rates.

Market expectations for another rate hike rise following inflation surprise

While money markets anticipate that the central bank will maintain the current rate on June 7, the odds of a hike next month have increased to around one in three after Tuesday’s inflation surprise.

Derek Holt, the head of Scotiabank Capital Economics, is among those on Bay Street who anticipate another interest rate increase, and he believes that sooner rather than later would be a better approach. In a note to clients on Wednesday, Holt argued that if the Bank of Canada needs to raise its benchmark rate, which determines borrowing costs for lenders and borrowers, it should do so early.

Holt emphasized that if business and consumer expectations for inflation remain elevated for an extended period, it will be more challenging to regain control over price pressures and achieve the Bank of Canada’s two percent target. He wrote, “If the BoC doesn’t adopt the ‘crush it, killer mentality,’ then it may never succeed in getting inflation down to (two percent).”

Holt also noted that the central bank has been willing to surprise the markets with rate hikes, as market expectations regarding the magnitude of rate increases were incorrect in three out of the eight previous decisions.

In a note earlier this week, Jay Zhao-Murray, an analyst at Monex Canada, pointed out that in addition to the rise in headline inflation figures in April, the central bank’s preferred indicators of “core inflation” also accelerated on a three-month basis, although they cooled on an annual basis.

Taking these factors into account, along with indications that the housing market correction has reached its bottom and sales activity is picking up again this spring, Zhao-Murray suggested that the Bank of Canada might implement an “insurance hike” in June. However, other economists believe that the central bank will likely maintain its position on the sidelines next month. The hope is that the productive capacities of the economy will continue to drive increases in production which will eventually lead to a fall in prices. The continued robustness of the economy and the labour market will keep demand high.