Forward Guidance: Soaring Gas Prices Will Drive Up Inflation Rates
Canada’s CPI report for February is expected to show a firm 5.4% year-over-year increase. It will likely rise closer to 6% in March due to soaring prices at the pump. In the first week of March alone, gasoline prices soared 16% – 46% above year-ago levels – as Russia’s invasion of Ukraine pushed prices up. world oil prices. Commodity prices for commodities such as wheat and metals have also risen sharply and are expected to dominate the near-term inflation outlook. Widening pricing pressures to an ever wider range of products was already a big concern for central banks. Our forecast for the CPI in February should once again be broad-based as even more goods and services see their prices appreciate faster. This trend mirrors what is happening in the United States, where inflation rose to 7.9% in February. We expect the US Fed to follow the Bank of Canada rate hike from earlier this month with its own 25 basis point hike next week.
Despite rising inflation and intensifying geopolitical risks, domestic economic data should look firm. Early estimates for January manufacturing and wholesale sales were surprisingly strong given a sharp decline in hours worked related to the rapid spread of Omicron during that month. The preliminary estimate for retail sales in January was up 2.4%. And our own card spending tracker points to another firm reading for February alongside a sharp rebound in travel and hospitality spending as pandemic restrictions eased.
Monitoring data for the coming week:
We expect housing starts in Canada to reach 260,000 in February from 231,000 in January. Permit issuance has been considerably stronger, averaging 300,000 in the last three months ending in January. But labor shortages remain a significant problem, which can lengthen the time between permit issuance and actual housing starts.
U.S. Federal Reserve policymakers are expected to raise the federal funds target range by 25 basis points, the first increase since 2019, with very low unemployment and firming inflationary pressures offsetting increased geopolitical headwinds from the climate. Russian invasion of Ukraine. We expect four more hikes (of equal size) in 2022 to move the target range from 1.25% to 1.50% by the end of the year.