Inflation has likely slowed, but economists warn we’re not out of the woods yet

But the same team warned that, beneath the headline figure, some core prices are still bubbling up and will not likely peak until later this year.

“Food price growth likely accelerated again,” wrote economists Nathan Janzen and Claire Fan in a Sept. 16 RBC Economics note. “And we look for the rate excluding food and energy products to hold steady at 5.5 per cent. Alongside this, the Bank of Canada’s preferred core inflation measures also likely remained elevated.”

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The Bank of Montreal’s chief economist, Douglas Porter, echoed this sentiment, though warned that like the U.S., which had recently reported a hotter than expected annualized rate of 8.3 per cent in August and saw core price pressures rise, Canada should “beware the core trends.”

“A weaker currency could further fuel consumer goods and imported food prices,” Porter wrote in a note to clients late last week. “To this stage, Canadian grocery prices have actually been less fiery than their U.S. counterparts (9.9 percent year-over-year compared to 13.5 percent year-over-year).”

Comparing Canada to its neighbour south of the border, Canadian Imperial Bank of Commerce chief economist Avery Shenfeld noted that the difference in how shelter costs are treated in Canadian inflation figures should have cost pressures, excluding food and energy, falling faster than the U.S.

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However, Shenfeld also expects that since the price of goods excluding food and energy is driven upward by some supply chain issues and domestically driven services inflation is likely to peak in the second quarter of next year, core inflation won’t dip below the three percent mark until the second half of next year.

Despite the common refrain among economists that high inflation is not here to stay, there remain risks on the horizon. In his note, Shenfeld raised concerns of a wage-price spiral, a trend where workers seek higher wages to keep up with rising living costs, a pattern that can cause high inflation to become entrenched. Shenfeld specifically pointed to the recent success U.S. railway unions had in negotiating new deals and averting a strike as an example of such upward pressure on wages. Though the gains may not send unit labour costs soaring as they have in the past, Shenfeld said they still pose an inflation risk that economists and central banks are keeping an eye on.

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“Still, the concerns are that this is a five-year package averaging close to five percent per year in wage hikes, partly backdated, but with a couple of years to run,” Shenfeld wrote. “That raises concerns that businesses are starting to assume that inflation will persist at elevated levels, baking in cost increases ahead that will make it tougher to winnow inflation down.”

Bank of Canada governor Tiff Macklem raised similar concerns during a July 14 video session hosted by the Canadian Federation of Independent Business. Macklem told the small business community not to plan for continued high inflation or to “build that into longer-term contracts” or labour deals.

The comments sparked a backlash against the head of the central bank, with some union groups arguing that Macklem should “stay in his own lane.” But Shenfeld wrote that he believed Macklem was not telling workers to avoid asking for raises.