MNI REALITY CHECK: Canada May CPI Seen Going to Decade High

Canadian industry leaders told MNI that whether inflation keeps accelerating beyond the highest pace in a decade depends on whether supply chain congestion turns around, because demand will remain solid as the economy re-opens and more people are vaccinated.

Consumer price inflation will likely to reach the fastest since May 2011 at 3.5% year over year growth, according to economists surveyed by MNI, in a Statistics Canada report due at 830am EST on Wednesday. Most of the gain is driven by the base effect as current prices are compared with weakness last year during the first wave of the pandemic.

While the pace is less dramatic than the U.S. rate of 5%, the impact on policy is greater because Canada's central bank has a single mandate to keep prices in the middle of a 1%-3% band. Governor Tiff Macklem has also led G7 policy makers by pulling QE back twice and some investors expect a third move at the next meeting in July.

The BOC won't see the June CPI figures before that meeting, a report where StatsCan has told MNI they will overhaul the price basket, and preliminary data has shown a potential boost of 0.4pp.

May CPI is expected to show a monthly gain of 0.4% to match the April rate, as shelter and gasoline prices continue to climb.

Kevin Lee, CEO of the Canadian Home Builders' Association:

The biggest challenge is shortages of material, especially lumber, and the increased price of almost anything related to construction, Lee said.

"In the first quarter we had delays averaging six weeks in terms of construction time and closing per houses because of the material shortages," he said.

"What we have seen is dramatically escalating in housing prices over the past year and that is a function of strong demand and really limited supply, which was a problem prior to the pandemic. And as soon as people had enough saving and interest rates came down we saw an explosion of demand."

"We are seeing continued strong demand in the market all across the country and we expect that to continue through 2021 and beyond."

The industry is also being squeezed by more Canadians working at home and seeking more space for personal offices while the pandemic also makes it difficult for builders to hire new workers, he said.

Brian Menzies, Executive Director of Independent Wood Processors of BC:

"What we are seeing is more fear purchasing which is going to continue until the market gets more stable," he said. Shipping costs are also rising because of limited supplies of containers, he said.

"Production capacity has expanded considerably for most of our members and attracting employees has been difficult mostly because there are lots of demand for people to work in jobs with a similar pay scale," Menzies said.

"The longer the pandemic goes on, the more unstable the supply chain would be, and if the demand continues as it is, as a result of the pandemic, I don't see any prices changing in near future, I see them continuing at the high price."

Brendan Byrne, Grain Farmers of Ontario Chairman:

"We are probably not too far off from our pre-pandemic demand level as people start to adjust their lifestyle, and we are at the point that a lot of the recovery happened," Byrne said.

Farm prices are more stable because of longer-term supply contracts, he said, he said. "The prices are a lot better than it was in previous years, but not a lot of our members have been able to capture that dollar value because they would already have been contracted," he said.

From here, bad weather would have a bigger impact on pushing up farm prices than the pandemic, he said.