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Price hikes spreading as inflation hits 3.3 per cent

Inflation is spreading through the economy at a faster pace than the Bank of Canada expected, marking a turning point after two years of little price pressure.

Until now, higher prices had largely been limited to energy, defying a trend that has swept through other countries as commodity prices surge. But they’re now showing up throughout the economy, from the post office to department stores, promising to influence key business decisions and threatening to drive up rents.

“March was an inflection point,” Stéfane Marion, chief economist and strategist at National Bank Financial, warned Tuesday after Statistics Canada reported that the annual inflation rate climbed in March to 3.3 per cent, up from 2.2 per cent a month earlier and the fastest pace in 2½ years.

“The cyclical low is behind us.” Mr. Marion said.

As the economy revs up and energy prices surge, higher prices are spreading to items such as car insurance, women’s clothes and non-prescription drugs. Food prices, for example, are now up 3.3 per cent from a year ago, while parking costs are up 8.2 per cent, tuition fees 3.8 per cent, and cable and satellite rates 7.1 per cent.

The ramifications can be sweeping. Faster inflation bolsters the view that the Bank of Canada will boost interest rates in the coming months, possibly in July. It could also, in the longer run, affect everything from Canada Pension Plan and other payments that are adjusted from time to time, to child support agreements that are tied to changes in consumer prices.

In the near term, the strong reading lifted the Canadian dollar, which tallied its biggest one-day gain in two months. Some analysts even project an inflation rate of 4 per cent later this year.

From a corporate perspective, the sharp rise in energy costs is the greatest concern, and those are filtering through to higher prices charged to clients.

Gasoline prices are 18.9 per cent above year-ago levels, and forecast to head higher still. Prices for food bought from stores jumped 3.7 per cent in March, the biggest annual increase in 19 months, as bad weather in Mexico and the southern United States drove up vegetable prices.

Canadian companies including Metro Inc. and George Weston Ltd., the parent of Loblaw Cos. Ltd., have said they expect prices to go up this year amid soaring commodity prices. And Tim Hortons Inc. recently hiked the price of a cup of coffee.

Rising fuel prices are the main culprit in pushing up the cost of doing business at HSE Integrated Ltd., for example, a Calgary company that sells health and safety services to industry, president David Yager said.

“We’re getting clobbered on fuel,” Mr. Yager said, because the company runs about 400 trucks used to transport its employees and equipment to client locations. It tries to pass those higher costs on to customers.

Upward pressure on wages, because of a tighter job market in Alberta, is also threatening to drive labour costs higher, he said.

Across Canada, the consumer price index was the strongest since September, 2008, Statistics Canada said, topping all economists’ forecasts. The headline reading is now sitting uncomfortably above the Bank of Canada’s target range of 1 to 3 per cent, and has topped the 3-per-cent mark faster than the central bank had projected.

It’s not just volatile goods on the upswing. The core rate of inflation, which excludes the eight most volatile items such as vegetables, gasoline and cigarettes and is closely watched by the central bank, jumped to 1.7 per cent from 0.9 per cent a month earlier.

Prices rose in all major components of the consumer price index. The monthly rate of inflation quickened to 1.1 per cent – the largest increase since the introduction of the GST in January, 1991. One of the biggest surprises was women’s clothing, which jumped 11.5 per cent on a monthly basis, despite a strong Canadian dollar that should dampen prices.

Analysts attributed the clothing price increase to rising cotton and transportation costs, along with higher labour prices in China. Rising Asian currencies against the Canadian dollar may be also playing a role, said Sheryl King, economist at Merrill Lynch Canada.

She believes the headline rate of inflation will pass 4 per cent in the coming months due to energy and food. She sees food inflation doubling to a 7-per-cent rate, and notes that food and beverages account for a fifth of the weighting of the core CPI. “The food story is probably going to persist.”

The sharp jumps in food prices are hurting some companies – including those in the restaurant sector. Neil Maclean, chief financial officer at Keg Royalties Income Fund, said food costs are on the upswing at the restaurant chain.

Across Canada, more companies are bracing for hotter inflation, a central bank survey showed earlier this month. The portion of executives who thought the inflation rate would rise to 3 per cent or more in the next two years jumped to 15 per cent – the highest share since 2008.

A key concern is that the apparent spike in inflation will prompt the Bank of Canada to raise interest rates prematurely, doing more harm than good, said David Ross, chief financial officer at Bonnett’s Energy Services Trust.

“They are really underestimating the pressure that raising interest rates is going to put on the general economy,” Mr. Ross said. Higher rates will be very damaging to “the guy on the street who has variable rate debt,” he said.

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