Budgets are set to tighten further for consumers already feeling the pinch: the latest inflation numbers are in from Statistics Canada, revealing prices surged 5.7% year over year in February. That’s above the 5.5% initially forecast by economists, and is the largest gain seen since August 1991, when inflation surged 6%.

While rising inflation has largely been driven by higher gasoline and grocery prices, steep housing and rental prices are making their presence known; shelter costs, which include both owned and rental accommodation, increased 6.6% -- the fastest pace seen since 1983. As well, the “homeowner’s replacement cost” -- related to the price of new homes and other accommodation expenses, including realtor commissions on sales - rose 13.2% Helping offset the shelter index, however, was a -6% dip in mortgage interest costs, as a result of historically low interest rates.

StatCan notes that rent prices have risen by 4.2%, as demand for units has returned strongly as the economy reopens following the pandemic, along with improved employment and the resumption of international migration to Canada.

Fuel and Food Costs are Biggest Drain on Wallets

Of course, the sharpest pain is currently felt at the gas station, with drivers paying 32.2% more at the pump than they did last year, and 6.9% more than in January. Fuel prices have been incredibly volatile due to the ongoing geopolitical tensions and global oil supply uncertainties resulting from the Russian invasion of Ukraine.

That’s in turn trickling into grocery costs, with prices for food purchased from stores spiking 7.4% annually -- the largest yearly increase since May 2009 - and up 6.5% from January. A big part of this is due to higher transportation costs as it’s getting pricier to bring in out-of-season or regional produce over land and air. 

Unfortunately, inflation pain will intensify before returning to more normal levels next year. In a recent interview with STOREYS, Pedro Antunes, Chief Economist at the Conference Board of Canada, said that should gas price trends continue, 7% growth is not far off.

As well, according to BMO Economics, inflation will be influenced by the same trend in the U.S., where CPI is expected to hit 8.6% by April. “Likewise, Canada's inflation rate is expected to rise from 5.1% y/y in January to 6.0% in April, before falling back to 5% in December and below 3% late next year. While wage growth remains calm in Canada, rents are likely to chug higher due to surging house prices. Inflation in both countries will likely stay above pre-virus levels even at the end of next year, and this assumes resource prices retreat from current levels. We expect WTI oil prices to average $100 a barrel this year and $85 in 2023,” states BMO’s report.

This Could Result in More Aggressive Rate Hikes

In addition to shelling out more to get around and feed their families, today’s news could pile even more financial pressure on Canadians in the form of their monthly mortgage payments. As inflation has hovered above the 5% mark for two consecutive months, expectations are growing for policymakers to take more aggressive action to curb it by raising interest rates, which will in turn make applying for new debt - and paying off - more expensive. 

Typically, the Bank of Canada, which controls the cost of borrowing via its trend-setting Overnight Lending Rate (consumer banks use it to set their variable mortgage and line of credit pricing), tries to keep inflation within a target range of 2%. That range hasn’t been seen since 2019 - but due to extraordinary measures to protect the economy during the worst of the pandemic, the central bank has been forced to let inflation run hot longer than is typical, implementing its first rate hike earlier this month.

According to Bloomberg’s economist panel, today’s data has spurred markets to price in a total of seven more BoC increases this year, which will bring its rate to a minimum of 2%. This is slightly more aggressive than previously called for; a separate panel of economists has previously stated a rate of 1.65% is likely the maximum borrowers could withstand this year.