Canada’s inflation rate inched up to a new 31-year high in April, causing many observers to suggest the Bank of Canada is now more likely to deliver two back-to-back half-point rate hikes in June and July.  

On Wednesday, Statistics Canada revealed that its headline Consumer Price Index rose to 6.8%, driven largely by increases in food and shelter costs. The Bank of Canada’s preferred measure of core inflation, which removes some of the more volatile items, rose from 3.93% in March to a 32-year high of 4.23% in April.

“The fact that headline inflation stepped up even a wee bit to yet another multi-decade high in a month when pump prices briefly relented and the base effects were helpful speaks volumes,” BMO economist Doug Porter commented.

One positive sign, however, is that there isn’t yet evidence of a rise in inflation expectations, which can become a self-fulfilling prophecy and serve to drive inflation higher, CIBC economists noted.

The last time that happened in the 1970s, “consumers, fearing further price increases, brought forward purchases, which spurred demand and caused inflation to rise even further,” the CIBC economists wrote.

“Today, consumers are telling us that they aren’t behaving in the same way, although, as well as being a sign of grounded inflation expectations, that could also be because households had already brought forward goods purchases during the pandemic.”

Economists expect higher inflation ahead

This was the fourth consecutive upward surprise to market expectations, and many believe inflation will continue to get worse before it gets better.

“Barring a deep dive in oil prices in coming weeks and months, we expect that the worst is yet to come on the headline readings, and that inflation north of 6% will still be with us by the end of this year,” Porter added.

TD Bank’s James Orlando agrees, noting the cost of basic necessities continues to push higher across the country.

“We are not expecting much of a reprieve going forward, with food supplies likely remaining tight,” he wrote. “On the shelter side, we are likely to see a continuation of rent price increases alongside rising mortgage interest costs. This will be balanced against the impact of declining house prices.”

Bank of Canada likely to ramp up rate hikes to control inflation

What does this all mean for the Bank of Canada, whose job it is to maintain an inflation rate within its target range of 2% to 3%?

"With both growth and inflation tracking above forecasts when the ink is barely dry, it may drive a further sense of concern at the Bank of Canada toward expediting rate hikes,” noted Scotiabank economist Derek Holt.

In its latest forecasts released in April, the Bank of Canada anticipated headline inflation of 5.6% in the first quarter and 5.8% in Q2.

“Q1 landed at 5.8% y/y and Q2 is so far tracking 6.8% based solely upon April’s reading,” Holt noted.

As a result, markets and economists are in agreement that the Bank of Canada is likely to deliver another half-point rate hike at its June 1 meeting, potentially followed by another in July.

If that were to happen, prime rate would likely rise to 4.20%, lifting rates for variable and adjustable-rate mortgages, as well as lines of credit.

“Governor Macklem has said 50bps will be considered at the June 1 meeting, which is our forecast. He has also said he wishes to return to neutral fairly quickly,” Holt added. “If I were them, I would not be as confident in ruling out the need for a bigger move in June.”

For variable-rate mortgage holders concerned about future rate hikes, reach out to a broker who can go through your options.