LILLEY: Bank of Canada plays chicken with inflation as poultry prices spike

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The idea that inflation in Canada is just a short-term thing, “transitory” in the words of the central bank, took another hit on Wednesday.

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Statistics Canada announced that inflation ran at 4.4% in the month of September, the highest level since February 2003.

Even more remarkable, the Consumer Price Index hit this milestone with gasoline prices being flat for the month of September.

It’s true gas is up more than 32% compared to the same period a year earlier and is expected to see a 5% increase in October, according to economists, but this spike in the cost of living happened without a volatile price at the pumps. Instead, it was food, housing and cars that drove up the cost of living in September.

Don’t worry, though, just like Prime Minister Justin Trudeau says he doesn’t think about inflation, Bank of Canada (BOC) Governor Tiff Macklem thinks it’s “transitory.”

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“We think there’s good reasons to believe that these are one-off price increases, they won’t create ongoing inflation,” Macklem said last week.

When you are earning more than $500,000 a year, maybe you don’t care or notice that the price of bacon is up 20% over last year, that beef is up 13%, chicken up 10.3% and butter, eggs and cheese up a mere 5% on average. Normal people notice these price increases month over month, year over year, so Mr. Macklem’s assurance that this is “transitory” rings a little hollow.

The last time the monthly inflation number was below 3% was in March 2021 and many economists don’t expect it to drop back down to that range for some time.

“Short-term metrics continue to point higher, most measures of core are running around 3% or higher, and gas prices are about to make more noise, so the heat is still on for inflation,” Bank of Montreal chief economist Douglas Porter said on Wednesday.

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By Porter’s outlook, we won’t see inflation dip back down to a more manageable 2.5% until around this time next year.

“Suffice it to say, that strains the definition of transitory,” Porter said.

Porter isn’t alone in disputing the idea that the inflation we are seeing now is short term.

“I’d say there is persistent inflation building,” Royal Bank CEO Dave McKay said last week.

National Bank CEO Louis Vachon agrees with McKay that inflation is a bigger issue than the central bank is letting on, telling the Globe and Mail last week that once COVID recedes, inflation will be the number one economic issue. A BOC survey of businesses found that most expect inflation above 3% for the next two years.

Inflation isn’t unique to Canada; it’s becoming a global issue, along with supply chain problems that are resulting in a lack of everything from semiconductor chips to roofing shingles, home appliances to blue paint. What is unique to Canada is that neither our political leadership in Ottawa, nor the central bankers hired to look after such issues, see this as a problem.

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The bottlenecks at North American ports, the lack of transportation personnel and infrastructure to move goods, the shortage of raw materials are all problems expected to persist into 2022 and so, too, will inflation. Eventually, the BOC will be forced to act and when it does, instead of slowly and carefully trying to adjust to a problem, they will likely bring in a sledgehammer.

The central bank may be forced to hike interest rates at a quicker pace than expected to deal with inflation, meaning families and businesses struggling with higher daily bills will see higher borrowing costs for credit cards, lines of credit, and mortgages.

Buckle up folks, we might be moving from the pandemic frying pan and into the economic fire.

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