Is Canada’s inflation rate getting out of control? Some economists worry it is

Concerns are mounting among some economists that Canada’s inflation rate is getting out of control following a 5.7 per cent jump in February, the likes of which has not been seen since 1991.

While the inflation rate still has a ways to go before hitting the double-digit increases seen in the early 1980s, some recall with a shudder the dramatic impact the hyperinflation of the time had on interest rates, with five-year fixed mortgage rates spiking above 20 per cent in 1981.

Last April, Bank of Canada governor Tiff Macklem called the then three per cent inflation rate increase a “blip,” and predicted the rate would drop back down to two per cent by the end of the year, but it continued to edge higher.

Two weeks ago, the Bank of Canada raised its key policy rate to 0.5 per cent, marking the first hike in two years. The overnight rate is widely expected to jump as high as two per cent this year, as the bank struggles to cool rising prices.

But some economists worry that it might be too little, too late. The bank’s ability to control short-term inflation is coming into question as economists predict inflation could hit 6.5 per cent by the summer.

“Whether (runaway inflation) could happen again is clearly the risk and potential nightmare for policy-makers and everyone else,” said Douglas Porter, chief economist and managing director of BMO Financial Group.

“This is more than a food and energy story,” he said. “It’s also rent, home prices, strong vehicle prices — and policy-makers have to address the demand. The Bank of Canada and finance departments in Canada and other provinces need to take a bit of stimulus out of their policies.”

Porter said everyone looks to the Bank of Canada to help cool inflation, but “government policy has a role to play here (as well).”

Derek Holt, vice-president and head of capital markets economics at Scotiabank, said there is a real risk that inflation could get out of control.

“It’s well above the Bank of Canada’s target. Indicators show that people have little confidence that the bank will be able to bring down inflation to its two per cent target. We’re in it for the long haul.”

The Bank of Canada’s rate hikes can cool inflation long-term, but the impact won’t be seen in the near future, Holt said.

“It’s something that can try to bring inflation back down by the end of the year and into 2023,” he said. “In the meantime we’re going to see inflation numbers pushed quite a bit higher, at least from summer to fall.”

Holt said any inflation spike would likely be lived shorter than the jump that occurred in the 1970s and ’80s, when interest rates spun out of control. This time, he said, the inflation drivers are supply chain issues and gas prices: issues that won’t persist for years.

“Even if the Bank of Canada is behind (on cooling inflation) right now, I would expect it to be rapidly catching up, as there are a series of expected rate hikes to cool it down. There wasn’t that dynamic back in the ’70s and ’80s,” he said.

Rannella Billy-Ochieng, an RBC economist, agrees that regulatory bodies can prevent the prolonged hyperinflation seen historically. “We’re in a different environment with central banks mandated to target inflation,” she said.

“The concern is that inflation pressures are broadening, so it’s not coming from one thing but multiple things that are over the two per cent target,” she said.

Fuel, groceries, gas and housing prices are propelling Canada’s annual inflation.

“It’s definitely very hot and too hot for comfort,” said Porter. “What’s a bit unnerving is just how one thing after another in the past year keeps happening.”

A series of unpredictable events — the pandemic, followed by the trucker protests in Canada and then Russia’s invasion of Ukraine — have impacted the economy since the start of 2022.

And the February numbers don’t take into account what we’ve seen in the days since the war began, said Porter. “The gas price increases have been mostly in March, so that’s yet to show up. Because of that, inflation numbers will be higher in March, assuming nothing else major happens,” he said.