Earlier this week, we learned that Canada’s headline CPI inflation rose to a 30-year high of 4.8% in December.

That had a number of economists concerned, with many saying the persistently high inflation requires immediate attention from the Bank of Canada.

The experts aren’t the only ones concerned.

Nearly three in five Canadians (57%) say it is now more difficult to feed their households due to rising prices, while nearly 40% said they are worse off financially now compared to last year, according to an Angus Reid Poll.

Businesses are feeling the effects as well. Three quarters said they are facing labour shortages and are planning to raise wages over the next year to attract and retain staff, according to the Bank of Canada’s fourth-quarter Business Outlook Survey.

Two-thirds of businesses now expect inflation to remain above 3% over the next two years.

RBC CEO David McKay sounded the alarm on inflation last week, calling on the central bank to take “rapid action” and start raising interest rates.

High home prices are another concern

“This is permanent, sustained inflation that has to be dealt with through monetary policy, and therefore we need rapid action this spring and a series of rate increases to address it,” he told BNN.

Headline inflation is being driven higher primarily by higher prices for food, vehicles and housing.

Housing, including both rent and home prices, is a big one. Home prices rose at their fastest pace on record, with the Home Price Index up 26% year-over-year, according to the Canadian Real Estate Association (CREA).

The average selling price is now $713,500, while the months of housing inventory fell to a new record-low of 1.6 months. That’s well below the longer-term average of five months and suggests home prices will continue to face upward pressure due to a lack of supply for some time yet.

“There are currently fewer properties listed for sale in Canada than at any point on record,” said CREA’s chief economist, Shaun Cathcart. “So, unfortunately, the housing affordability problem facing the country is likely to get worse before it gets better.”

Changing rate forecasts

As a result of these pressures, markets increasingly expect the Bank of Canada to start its rate-hike cycle earlier than expected by announcing a quarter-point rate increase on Wednesday.

Bond markets are pricing in a nearly 90% chance that the central bank will hike by 25 basis points next week. That’s despite previous guidance from the Bank that rates would remain low until the “middle quarters” of 2022.

But experts say the move would be warranted, and that waiting any longer risks letting inflation and rising home prices run further out of control.

“The BoC would not tighten policy just because of housing, but housing pressures on top of ripping inflation change the equation,” wrote Scotiabank economist Derek Holt. “Waiting to hike until April or later, and doing so tepidly, will be too little, too late and the BoC would risk wearing full responsibility for another massive gain in house prices, more investor activity than even what we’ve observed so far, and greater housing imbalances and future vulnerabilities.”

But, there’s still a chance the Bank of Canada will take one more month to analyze the data before committing to its first rate hike since 2018.

“We expect the bank to hold off on a change next week, but in a very close call,” noted RBC economist Robert Hogue, adding that the conditions to support higher rates are now in place. “The BoC is clearly running out of reasons to keep interest rates at emergency low levels. Rates will rise soon, even if the bank only uses next week’s announcement to foreshadow them rather than hiking immediately.”

For advice on mortgage product selection, and to learn more about how rate increases may impact your decisions, contact your broker to review your options.