'We're in for a run of inflation not just in March but in April as well': Antunes

Key Concepts

• CPI (Consumer Price Index): A measure that examines the weighted average of prices of a basket of consumer goods and services.
• Core Inflation: Inflation excluding volatile items like food and energy.
• Supply Shock: An unexpected event that changes the supply of a product or commodity, resulting in a sudden change in price.
• Base Year Effects: The impact of price changes from a year ago on the current inflation rate.
• Hawkish Monetary Policy: A stance by central banks favoring higher interest rates to keep inflation in check.
• Fiscal Policy: The use of government spending and taxation to influence the economy.

Inflation Data and Market Analysis

The discussion centers on the latest inflation figures, which showed a year-over-year CPI of 2.4% (against a 2.6% expectation). Core inflation came in at 2.3%, matching expectations, while core inflation with a trim was 2.2% (against a 2.3% expectation).

Pedro Antunes, Chief Economist at Signal 49 Research, attributes the recent uptick in inflation primarily to a 20% increase in gasoline prices during March. He warns that April inflation figures will likely be higher, as gasoline prices have risen approximately 30% above February levels, exacerbated by geopolitical tensions in the Strait of Hormuz.

The Bank of Canada’s Stance

Antunes notes that the Bank of Canada remains "hawkish" due to lingering concerns from the 2022 inflation spike caused by the Russian invasion of Ukraine.

• Wage-Price Spiral: The Bank is particularly worried about wage inflation, fearing that past commodity price hikes have become embedded in wage expectations.
• Monetary Policy Limitations: Antunes argues that monetary policy is ineffective against supply-side shocks. Raising interest rates during a weak economy—while facing an energy price shock—risks hitting the economy too hard.
• Bond Yields: Market participants have already priced in tighter monetary policy, leading to higher debt financing costs for consumers and businesses even before official rate hikes occur.

Food Inflation and Supply Chain Pressures

Food inflation remains a significant concern, currently running at 4.4%. Antunes highlights that this is not merely a retail issue but a systemic one:

• Fertilizer Costs: Natural gas, which is impacted by global supply chain disruptions, is a key input for fertilizer. As global prices rise, domestic food production costs follow.
• Impact on Households: Food inflation is described as "hurtful," particularly to lower-income households, as it is a non-discretionary expense that cannot be easily reduced.

Fiscal Policy and Gasoline Taxes

The discussion touched upon the impact of government gas tax cuts. Antunes suggests:

• Effectiveness: While a tax cut of approximately 10 cents helps mitigate the 30-cent rise in pump prices, it is a "drop in the bucket" regarding broader transportation and supply chain costs.
• Top-line vs. Core Inflation: While the Bank of Canada focuses on core inflation, Antunes emphasizes that "top-line" (headline) inflation is what dictates consumer purchasing power and future wage demands. He suggests that fiscal policy, in this instance, may be a more appropriate tool than monetary policy to provide relief to consumers.

Synthesis and Conclusion

The current economic environment is characterized by high uncertainty driven by geopolitical instability (Middle East and Ukraine). The primary takeaway is that the economy is facing a persistent supply-side energy shock that is spreading into food and transportation costs. While the Bank of Canada is unlikely to raise rates immediately, they remain in a "wait and see" mode, balancing the need to curb inflation against the risk of stifling an already weak economy. Antunes concludes that until energy prices stabilize, consumers should expect continued inflationary pressure throughout the spring.