Inflationary pressures broadening

The evidence of broadening inflationary pressures and the further rise in oil prices suggest that the balance of risks to our inflation forecast lies to the upside. The January consumer price data showed a surprisingly large rise in headline inflation, to a 31-year high of 5.1%. The prices of 17 of the 55 goods & services components increased by more than 1% m/m, up from an average of 10 in the preceding three months and the joint-highest since the early 1990s. In normal times, the Bank of Canada could take some comfort from the fact that services inflation, which is usually considered the best indicator of domestic inflationary pressures, remained very low at just 1.4% in January. But the current weakness of services inflation is partly due to the continued impact of the pandemic, with the latest round of restrictions causing the prices of airfares and travel tours to fall again in January. In any case, the tone of the Bank’s communications has clearly turned more hawkish since the January policy meeting. Senior Deputy Governor Timothy Lane recently said that the Bank may be “forceful” with its tools to get inflation back to target. We doubt the Bank will kick things off with a 50 bp hike next week, but there is a growing chance that it will follow a 25 bp hike in March with another one in April.