Canada’s oldest bank sees much higher inflation as commodity prices rise

Expectations of higher inflation in Canada are rising as it spreads to other components. BMO Capital Markets’ latest forecast contained upward revisions to the Consumer Price Index (CPI). The inflation measure is expected to rise faster this year as commodity prices soar. The gap between the Bank of Canada’s (BoC) and BMO’s forecasts is widening, with the former believing that inflation will disappear on its own.

BMO has revised inflation upwards this year

Forecasts for the Canadian Consumer Price Index (CPI) are rising rapidly. BMO expects annual growth of 4.7% for the 2022 CPI, compared to 4.5% in the previous forecast. Most of the increase shows rising expectations in the second half of the year.

Breaking it down quarterly, all quarters should now see higher inflation. The first three quarters of 2022 are forecast to rise by 0.2 points per quarter. In the fourth quarter, it took a big leap, doubling in size – 0.4 points from previous forecasts. Recent expectations have exceeded limits, with low rates persisting longer than expected.

The Bank of Canada expects much less, but its forecast increases

The CPI forecast is climbing more aggressively than the BoC expects. The central bank last forecast annual growth of 4.2% for 2022, up from its previous growth forecast of 3.2%. Independent expectations are rising very rapidly as fewer and fewer people see monetary policy moving fast enough to calm inflation.

More inflation expected due to rising house and commodity prices

The main reason for the adjusted expectations has to do with rising commodity values. BMO cited the rise in aluminum, nickel, wheat and corn as reasons why costs will rise. The “Russian-Ukrainian crisis” gives new reasons to believe that prices will rise. Wood and oil prices are also back with a bang. Then there’s real estate, with high land prices turning into the cost of entry for everything.

Higher inflation expectations are rising across the economy, especially for commodities. There are two catches in how this plays out. On the one hand, the American Federal Reserve which had qualified it as an inflationary shock, convinced that higher rates will be necessary to slow down inflation. RBC also agreed, calling for higher rates before inflation in Canada gets sticky.

On the other side is the BoC, which believes that inflation is entirely due to external forces. They see inflation largely disappearing on its own at a later time when supply chains catch up. Of course, they’ve been saying that for a year, slowly increasing their inflation forecasts. Technically, everything is transient over a long enough period of time, isn’t it?

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