INFLATION MONITOR - JUNE 2022 - June 07, 2022 - DPB

June 07, 2022

 INFLATION MONITOR – JUNE 2022

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The Parliamentary Budget Officer (PBO) supports Parliament by providing
economic and financial analysis for the purposes of raising the quality of
parliamentary debate and promoting greater budget transparency and
accountability.

This report provides current analysis of recent consumer price inflation data.

Lead Analyst:
Diarra Sourang, Advisor-Analyst

This report was prepared under the direction of:
Chris Matier, Director General

Nancy Beauchamp, Marie-Eve Hamel Laberge and Rémy Vanherweghem
assisted with the preparation of the report for publication.

For further information, please contact pbo-dpb@parl.gc.ca.

Yves Giroux
Parliamentary Budget Officer

RP-2223-006-S_e
© Office of the Parliamentary Budget Officer, Ottawa, Canada, 2022

Table of Contents
Summary 3

1. Current Analysis 6

 Recent developments 6
 Drivers of CPI inflation 10
 CPI inflation and purchasing power 14
 Inflation expectations 15

2. Broad-based vs. concentrated inflation 17

 Personal Consumption Expenditure inflation 17
 Dispersion of price changes 19
 Filtering out supply disruptions and sector-specific shocks 21

 PCE inflation and dispersion of price changes 23

Notes 25

Inflation Monitor – June 2022

 Summary
This report provides current analysis of recent consumer price inflation data.

Recent developments

Total Consumer Price Index (CPI) inflation has exceeded the 3 per cent upper
bound of The Bank of Canada’s control range since April 2021. With a rate
of 6.8 per cent recorded in April 2022, CPI inflation now sits at its highest
level since the introduction of inflation targeting in 1991.

Since the beginning of 2021, increases in the CPI have outpaced monthly
inflation consistent with the 2 per cent target. Indeed, annualized month-
over-month increases in the CPI have averaged 6.1 per cent, with outsized
increases in early 2022: 9.4 per cent in February and 13.0 per cent in March.

Inflation and the pandemic

The ultimate impetus for the resurgence of high inflation can traced back to
the COVID-19 pandemic. More recently, the Russian invasion of Ukraine has
compounded inflationary pressures.

• Strong consumer demand for goods running into constrained supply—
 along with surging energy and food prices—have contributed to
 boosting goods CPI inflation from -2.8 per cent in April 2020 to 9.1 per
 cent in April 2022.

• As public health measures eased and vaccination coverage expanded,
 pent-up demand boosted services consumption, putting upward
 pressure on services price inflation.

• Along with the pandemic-related move to remote working, low interest
 rates and high incomes have boosted the demand for housing. With
 supply constrained in the housing sector, house prices have rapidly
 increased across Canadian cities.

Inflation and purchasing power

Based on the most recent monthly data, CPI inflation in April was more than
double the increase in average hourly wages and almost 2 percentage points
higher than the increase in the maximum monthly Old Age Security (OAS)
payment.

• However, relative to pre-pandemic (February 2020) levels, the increase in
 the CPI in April (of 9.0 per cent) is only slightly higher than the increase
 in average wages (8.6 per cent) over the same period.

• The increase in CPI since the start of the pandemic has outpaced the
 increase in the maximum OAS payment (of 5.7 per cent), due to the time
 lag in the indexation of monthly payments.

 3

Inflation Monitor – June 2022

Inflation expectations

Both consumers and businesses have revised their short-term inflation
expectations upward. However, consumers’ longer-term inflation
expectations remain relatively stable and have trended lower during the
pandemic period.

Financial market participants largely do not see the current high-inflation
environment as permanent, with CPI inflation returning to the 2 per cent
target over the medium to long term.

To date, wage settlements data also show little indication of higher observed
and expected inflation feeding into wage negotiations in the unionized
sector.

Broad-based versus concentrated inflation

The inflation rate represents the average price change of a basket of goods
and services. We measure the dispersion of price changes within the basket
of goods and services using the standard deviation. For this analysis we use
personal consumption expenditure (PCE) data.

If prices of items in the consumption basket are changing by similar
amounts, the standard deviation is low, suggesting that inflation is broad
based. However, if price changes are limited to a few items that account for
a significant share of inflation, the standard deviation is high, suggesting that
inflation is concentrated.

• During the pandemic, inflation initially fell well below its historical
 average as crude oil prices collapsed and the standard deviation of price
 changes spiked in the second quarter of 2020.

• As inflation started to recover and rise above average levels in 2021, the
 standard deviation of price changes spiked again and has remained
 elevated near historical highs, suggesting that inflationary pressures
 have been concentrated across consumer expenditure items.

This finding is consistent with the view that supply or sector-specific issues
are a key driver of high inflation. A finding of broader-based inflationary
pressures would be more consistent with stronger aggregate demand as the
primary driver of high inflation.

• Our finding is also consistent with the Bank of Canada’s CPI-common
 measure of core inflation that “minimizes the impact of sector-specific
 disturbances in extracting the signal in total CPI inflation”.

• CPI-common inflation remained subdued over most of the pandemic
 period and has only recently risen above the upper bound of the Bank of
 Canada’s inflation-control range.

• The wide gap between CPI-common and the Bank of Canada’s other
 preferred measures of core inflation suggests that supply disruptions

 4

Inflation Monitor – June 2022

 and sector-specific factors are helping to push total CPI inflation to
 historically high levels.

That said, CPI-common inflation has picked up noticeably since January and
at 3.2 per cent in April 2022, exceeds the upper bound of the Bank of
Canada’s inflation-control range, suggesting that strong aggregate demand
is also putting upward pressure on inflation.

 5

Inflation Monitor – June 2022

 1. Current Analysis
 Inflation is typically defined as a persistent increase in the average level of
 prices over time.1 For households, inflation is primarily measured as the
 change in the Consumer Price Index (CPI), which compares the cost of a fixed
 basket of goods and services purchased by consumers over time.2

 The objective of the Bank of Canada’s monetary policy is “to preserve the
 value of money by keeping inflation low, stable and predictable”.3 In
 December 2021, the Government and the Bank of Canada renewed the
 inflation target, defined in terms of the 12-month rate of change in the CPI,
 at the 2 per cent midpoint of the 1 to 3 per cent inflation-control range.4

 Recent developments
 Total CPI inflation has exceeded the upper bound of The Bank of Canada’s
 control range since April 2021. With a rate of 6.8 per cent recorded in April
 2022, CPI inflation now sits at its highest level since the introduction of
 inflation targeting in 1991 (Figure 1-1).

Figure 1-1 CPI inflation at its highest level in 30 years
 Per cent Per cent

 20 20
 18 All-items CPI inflation 18
 16 Inflation control range 16
 14 14
 12 12
 10 10
 8 8
 6 6
 4 4
 2 2
 0 0
 -2 -2
 -4 -4
 1940-Jan
 1943-Jan
 1946-Jan
 1949-Jan
 1952-Jan
 1955-Jan
 1958-Jan
 1961-Jan
 1964-Jan
 1967-Jan
 1970-Jan
 1973-Jan
 1976-Jan
 1979-Jan
 1982-Jan
 1985-Jan
 1988-Jan
 1991-Jan
 1994-Jan
 1997-Jan
 2000-Jan
 2003-Jan
 2006-Jan
 2009-Jan
 2012-Jan
 2015-Jan
 2018-Jan
 2021-Jan

 Sources: Statistics Canada and Office of the Parliamentary Budget Officer.
 Note: The last data point is April 2022.

 6

Inflation Monitor – June 2022

 In the two years prior to the pandemic, monthly CPI inflation averaged
 2.1 per cent—only marginally above the 2 per cent target rate. With the
 onset of the pandemic in March 2020, CPI inflation decreased sharply, falling
 to -0.4 per cent in May 2020, and remained below the 2 per cent target rate
 through February 2021 (Figure 1-2, left panel). Inflation then rebounded
 rapidly, rising to 5.7 per cent in February 2022.

 However, the rapid rebound in CPI inflation over March 2021 to February
 2022 reflected, in part, “base-year effects”.5 That is, given the year-over-year
 nature of the calculation, the weakness in inflation in 2020 following the
 onset of the pandemic exaggerated the strength in inflation in 2021 and
 early 2022.

 Given the volatility in inflation over the pandemic period, it is informative to
 compare the current (April 2022) level of the CPI to its pre-pandemic level in
 February 2020. Figure 1-2 (right panel) shows that the CPI in April 2022 is
 8.7 per cent above its pre-pandemic level, with most of this increase
 occurring over the past year. If CPI inflation remained at 2.0 per cent
 (annualized, month-over-month basis) over this period, the CPI would be
 4.4 per cent above its pre-pandemic (February 2020) level, suggesting that
 approximately half of the inflation experienced to date has been “excess”.

 Figure 1-2 Inflation since the beginning of the pandemic
 Per cent Percentage change in the CPI
8
 10
 Total CPI inflation
7 8.7
 Average Jan 2018-Feb 2020
6 8 7.5
 Average Mar 2020-Feb 2021
5 Average Mar 2021-Apr 2022

4 6
 4.4
3
 4
2

1
 2
 1.1
0

-1 0
 2018 - Oct

 2019 - Oct

 2020 - Oct

 2021 - Oct
 2018 - Jan

 2018 - Jul

 2019 - Jan

 2019 - Jul

 2020 - Jan

 2020 - Jul

 2021 - Jan

 2021 - Jul

 2022 - Jan
 2018 - Apr

 2019 - Apr

 2020 - Apr

 2021 - Apr

 2022 - Apr

 Apr 2022 - Apr 2022 - Feb 2021 - 2% trend:
 Feb 2020 Feb 2021 Feb 2020 Apr 2022 -
 Feb 2020

 Sources: Statistics Canada and Office of the Parliamentary Budget Officer.
 Note: The percentage changes shown in the right panel are calculated using
 seasonally adjusted CPI data.

 Since the beginning of 2021, increases in the CPI have outpaced monthly
 inflation consistent with the 2 per cent target (Figure 1-3). Indeed,
 annualized month-over-month increases in the CPI have averaged 6.1 per
 cent, with outsized increases in early 2022: 9.4 per cent in February and
 13.0 per cent in March.

 7

Inflation Monitor – June 2022

Figure 1-3 Month-over-month increases in the CPI
 Per cent, seasonally adjusted

 CPI inflation
 1.25
 Jan 2018-Feb 2020: average m/m annualized = 2.0%
 1.00 Jan 2021-Apr 2022: average m/m annualized = 6.1%

 0.75

 0.50

 0.25

 0.00

 -0.25

 -0.50

 -0.75

 -1.00

 2018 - Jul

 2019 - Jul

 2020 - Jul

 2021 - Jul
 2018 - Oct

 2019 - Oct

 2020 - Oct

 2021 - Oct
 2018 - Jan

 2018 - Apr

 2019 - Jan

 2019 - Apr

 2020 - Jan

 2020 - Apr

 2021 - Jan

 2021 - Apr

 2022 - Jan

 2022 - Apr
 Sources: Statistics Canada and Office of the Parliamentary Budget Officer.

 As previously noted, the CPI represents a basket of good and services. These
 goods and services are divided into 8 major groups. Consumer price indices
 are also constructed for various geographical areas, including individual
 provinces and territories.

 Figure 1-4 indicates that, except for clothing and footwear, inflation in April
 2022 exceeded the average rate of inflation observed in the pre-pandemic
 period. In particular, the rate of inflation in the transportation category
 exceeded its pre-pandemic average inflation rate by almost 8 percentage
 points (3.3 per cent versus 11.2 per cent).

 8

Inflation Monitor – June 2022

Figure 1-4 Total CPI inflation: major components
 Per cent
 12 Average January 2018 - February 2020
 April 2022
 10

 8

 6

 4

 2

 0
 Food Shelter Housing Clothing and Transportation Health and Recreation, Alcoholic
 operations, footwear personal care education and beverages,
 furnishings and reading tobacco and
 equipement cannabis
 products

 Sources: Statistics Canada and Office of the Parliamentary Budget Officer.

 Similar to the breadth of higher inflation across categories of goods and
 services, consumers in all provinces and territories have experienced a
 significant increase in CPI inflation compared to the pre-pandemic period
 (Figure 1-5).

Figure 1-5 CPI inflation in provinces and territories
Per cent
10
 Average January 2018-February 2020
 9
 April 2022
 8

 7

 6

 5

 4

 3

 2

 1

 0
 NU SK BC YT NL AB QC NS NT ON MB NB PE

 Sources: Statistics Canada and Office of the Parliamentary Budget Officer.

 9

Inflation Monitor – June 2022

 Drivers of CPI inflation
 The ultimate impetus for the resurgence of high inflation can traced back to
 the COVID-19 pandemic. More recently, the Russian invasion of Ukraine has
 compounded inflationary pressures.

 Following the COVID-19 pandemic declaration by the World Health
 Organization in March 2020, several countries, including Canada,
 implemented lockdowns, disrupting production and temporarily reducing
 supply. At the same time, many governments provided emergency income
 support for individuals and businesses. With restrictions on in-person
 contact, such as stay-at-home orders, consumer demand shifted away from
 contact-intensive services toward goods.6 In Canada, demand also shifted
 toward housing.

 As economies started to reopen, renewed lockdowns and other public health
 measures, combined with shortages of intermediate inputs, labour and other
 disruptions, constrained supply while demand, particularly for goods, grew
 rapidly.7 Based on an index of global supply chain pressure developed at the
 Federal Reserve Bank of New York, supply chain disruptions reached record
 levels at the end of 2021 (Figure 1-6, left panel).8 In Canada, the proportion
 of businesses reporting labour and supply chain bottlenecks has increased
 significantly since the second half of 2021 (Figure 1-6, right panel).

 Figure 1-6 Supply chain disruptions and constraints
Standard deviation from average value Per cent
5 70 % of firms with supply chain bottlenecks
 Global Supply Chain Pressure Index
4 % of firms with labour bottlenecks
 60

3 50

2 40

 30
1
 20
0
 10
-1
 2018 - Jul

 2019 - Jul

 2020 - Jul

 2021 - Jul
 2018 - Apr

 2018 - Oct

 2019 - Apr

 2019 - Oct

 2020 - Apr

 2020 - Oct

 2021 - Apr

 2021 - Oct

 2022 - Apr
 2018 - Jan

 2019 - Jan

 2020 - Jan

 2021 - Jan

 2022 - Jan

 0
 2018Q1
 2018Q2
 2018Q3
 2018Q4
 2019Q1
 2019Q2
 2019Q3
 2019Q4
 2020Q1
 2020Q2
 2020Q3
 2020Q4
 2021Q1
 2021Q2
 2021Q3
 2021Q4
 2022Q1

 Sources: Bank of Canada, Federal Reserve Bank of New York and Office of the
 Parliamentary Budget Officer.
 Note: Last data point in the left panel is April 2022 and 2022Q1 in the right panel.

 10

Inflation Monitor – June 2022

 Figure 1-7 (left panel) shows the sharp rebound and strength in goods
 consumption in Canada following the contraction in the second quarter of
 2020. In the first quarter of 2022, goods consumption increased to 5.3 per
 cent above its pre-pandemic level. Despite a strong pickup in services
 consumption in the second half of 2021, spending on services remains
 2.1 per cent below its pre-pandemic level.

 Strong consumer demand for goods running into constrained supply—along
 with surging energy and food prices—have contributed to boosting goods
 CPI inflation from -2.8 per cent in April 2020 to 9.1 per cent in April 2022,
 registering one of the largest and most rapid swings on record (Figure 1-7,
 right panel). As public health measures eased and vaccination coverage
 expanded, pent-up demand boosted services consumption, putting upward
 pressure on services price inflation.

 Figure 1-7 Pandemic-related shifts in consumer spending and
 inflation
Index, 2019Q4 = 100 Percentage change, year over year

110 Volume of household services consumption 10
 Volume of household goods consumption Total CPI
105 8 Goods CPI
 Services CPI
100 6

 4
 95
 2
 90
 0
 85
 -2
 80
 -4
 2018 - Jul
 2018 - Oct

 2019 - Jul
 2019 - Oct

 2020 - Jul
 2020 - Oct

 2021 - Jul
 2021 - Oct
 2018 - Jan
 2018 - Apr

 2019 - Jan
 2019 - Apr

 2020 - Jan
 2020 - Apr

 2021 - Jan
 2021 - Apr

 2022 - Jan
 2022 - Apr
 75
 2018Q1
 2018Q2
 2018Q3
 2018Q4
 2019Q1
 2019Q2
 2019Q3
 2019Q4
 2020Q1
 2020Q2
 2020Q3
 2020Q4
 2021Q1
 2021Q2
 2021Q3
 2021Q4
 2022Q1

 Sources: Statistics Canada and Office of the Parliamentary Budget Officer.

 Along with the pandemic-related move to remote working, low interest rates
 and high incomes have boosted the demand for housing.9 With supply
 constrained in the housing sector, house prices have rapidly increased across
 Canadian cities.

 House prices influence the owned accommodation subcategory of shelter in
 the CPI, in particular the replacement cost component, which is an imputed
 depreciation expense. As house prices rise, replacement cost typically
 increases.10 Prior to the pandemic, replacement cost contributed
 0.2 percentage points, on average, to owned accommodation inflation
 (Figure 1-8).

 11

Inflation Monitor – June 2022

 Figure 1-8 Owned accommodation inflation and its components
 Percentage points, contributions to owned accommodation inflation

 10 10
Other
 8 8
Maintenance and repairs
 6 6
Insurance
 4 4
Property taxes
 2 2
Replacement costs
 0 0
Mortgage interest costs

Owned accommodation -2 -2

 -4 -4

 2018 - Jul

 2019 - Jul

 2020 - Jul

 2021 - Jul
 2018 - Apr

 2018 - Oct

 2019 - Apr

 2019 - Oct

 2020 - Apr

 2020 - Oct

 2021 - Apr

 2021 - Oct

 2022 - Apr
 2018 - Jan

 2019 - Jan

 2020 - Jan

 2021 - Jan

 2022 - Jan
 Sources: Statistics Canada and Office of the Parliamentary Budget Officer.

 The contribution of replacement cost to owned accommodation inflation
 rose sharply to over 4 percentage points in July 2021 as new home prices
 (house only, excluding land) increased by over 14 per cent on a year-over-
 year basis. In April, replacement cost contributed 0.7 percentage points to
 total CPI inflation of 6.8 per cent, which is down slightly from its high of
 0.8 percentage points in September 2021.

 With the strengthening in global economic activity over the course of 2021,
 commodity prices increased sharply (Figure 1-9, left panel). Supply issues
 and weather disruptions also contributed to boosting commodity prices over
 this period. Energy prices—specifically crude oil and natural gas—have
 remained high and volatile, particularly following the Russian invasion of
 Ukraine in February. Agricultural commodity prices also surged through
 2021 and spiked in February and March during the war in Ukraine.

 Rising crude oil prices have pushed gasoline prices higher. In April 2022,
 higher gasoline prices contributed 1.3 percentage points to the 6.8 per cent
 year-over-year increase in the total CPI. Excluding energy and food reduces
 total CPI inflation in April by over two percentage points to 4.6 per cent
 (Figure 1-9, right panel).

 12

Inflation Monitor – June 2022

 Figure 1-9 Commodity prices and CPI inflation
Per cent Per cent, year over year
350
 Energy prices (year-over-year 8 CPI inflation – April 2022
300 change) 6.8
 Agricultural commodity prices 7
250 (year-over-year change) 5.8
 6 5.4
200
 5 4.6
150
100 4
 50 3
 0
 2
 -50
 1
-100
 2018 - Jul

 2019 - Jul

 2020 - Jul

 2021 - Jul
 2018 - Oct

 2019 - Oct

 2020 - Oct

 2021 - Oct
 2018 - Jan
 2018 - Apr

 2019 - Jan
 2019 - Apr

 2020 - Jan
 2020 - Apr

 2021 - Jan
 2021 - Apr

 2022 - Jan
 2022 - Apr
 0
 Total CPI CPI excluding CPI excluding CPI excluding
 gasoline energy food and
 energy

 Sources: Bank of Canada, Statistics Canada and Office of the Parliamentary Budget
 Officer.

 Recent analysis by the Organisation for Economic Co-operation and
 Development (OECD) indicates that rising energy and food prices are a
 global phenomenon pushing up inflation in most countries (Figure 1-10).11
 The OECD notes “[s]upply-chain disruptions and pent-up consumer demand
 due to COVID-19 have contributed to high inflation in most countries”.

 Figure 1-10 Inflation has surged in most advanced economies
 Per cent

 10
 Canada France Germany
 Italy Japan UK
 8
 US G7 OECD Total

 6

 4

 2

 0

 -2
 Oct-18

 Oct-19

 Oct-20

 Oct-21
 Jul-18

 Jul-21
 Jan-18

 Apr-18

 Jan-19

 Apr-19

 Jul-19

 Jan-20

 Apr-20

 Jul-20

 Jan-21

 Apr-21

 Jan-22

 Apr-22

 Sources: OECD and Office of the Parliamentary Budget Officer.
 Note: The last data point is April 2022.

 13

Inflation Monitor – June 2022

 CPI inflation and purchasing power
 Over time, inflation erodes the purchasing power of money. To determine
 the implications of inflation on consumers’ purchasing power, it is
 informative to compare changes in the CPI to changes in components of
 household income such as wages and pensions.

 Figure 1-11 provides a comparison of CPI inflation and increases in wages
 and maximum Old Age Security (OAS) monthly payments, which are indexed
 to CPI.12 Based on the most recent monthly data, CPI inflation in April was
 more than double the increase in average hourly wages and almost
 2 percentage points higher than the increase in the maximum monthly OAS
 payment.13

 However, given the volatility of CPI inflation during the pandemic period, it is
 helpful to compare current levels of the CPI and incomes to their pre-
 pandemic levels (February 2020).

 Relative to February 2020, the increase in the CPI in April (of 9.0 per cent) is
 only slightly higher than the increase in average wages (8.6 per cent) over
 the same period. That said, the increase in CPI since the start of the
 pandemic has outpaced the increase in the maximum OAS payment (of
 5.7 per cent), due to the time lag in the indexation of monthly payments.

 With the increase in inflation during the pandemic, the gains in purchasing
 power experienced in the two years prior to the pandemic have been
 eroded.

Figure 1-11 CPI inflation and income growth
 Per cent
 10
 9.0
 8.6

 8
 6.8 6.9

 5.7
 6
 4.9
 4.6
 4.3
 4 3.3

 2

 0
 Apr 2022 Apr 2022 Apr 2022 Increase Average Increase Increase Average Increase
 CPI average increase in CPI wage in OAS in CPI wage in OAS
 inflation wage in OAS (Feb increase max. (Jan increase max.
 (y/y) increase max. 2020-Apr (Feb amount 2018-Feb (Jan amount
 (y/y) amount 2022) 2020-Apr (Jan 2020 2020) 2018-Feb (Jan 2018
 (y/y) 2022) - Apr 2020) - Jan
 2022) 2020)

 Sources: Statistics Canada and Office of the Parliamentary Budget Officer.

 14

Inflation Monitor – June 2022

 Inflation expectations
In its April Monetary Policy Report, the Bank of Canada noted concerns that
“high and persistent inflation can affect long-term inflation expectations”
which are “an important factor behind future inflation”.14

Both consumers and businesses have revised their short-term inflation
expectations upward (Figure 1-12, top panels). Consumers have increased
their 1-year ahead inflation expectation from 2.1 per cent in the first quarter
of 2021 to 5.1 per cent as of the first quarter in 2022. Similarly, 70 per cent
of businesses anticipate that inflation will be above 3 per cent for the next
year. However, consumers’ longer-term inflation expectations remain
relatively stable and have trended lower during the pandemic period.15

Financial market participants largely do not see the current high-inflation
environment as permanent, with CPI inflation returning to the 2 per cent
target over the medium to long term. The Bank of Canada notes that the
5-year break-even inflation rate (that is, the difference between 5-year
nominal and inflation-linked bonds) has increased to close to 3 per cent,
which is “consistent with a rise in inflation over the near term followed by a
decline toward the 2% target”.16 The long-term (greater than 10 years)
breakeven inflation rate also supports this view (Figure 1-12, lower left
panel).

To date, wage settlements data also show little indication of higher observed
and expected inflation feeding into wage negotiations in the unionized
sector (Figure 1-12, lower right panel).

 15

Inflation Monitor – June 2022

 Figure 1-12 Inflation expectations
Per cent Per cent
6 Consumers’ expectations Business expectations: 1-year ahead
 100
 90
5 80
 70
4 60
 50
 40
3
 30
 20
2 in 1 year 10
 in 2 years 0

 2018Q1
 2018Q2
 2018Q3
 2018Q4
 2019Q1
 2019Q2
 2019Q3
 2019Q4
 2020Q1
 2020Q2
 2020Q3
 2020Q4
 2021Q1
 2021Q2
 2021Q3
 2021Q4
 2022Q1
1 in 5 years

0
 2018Q1
 2018Q2
 2018Q3
 2018Q4
 2019Q1
 2019Q2
 2019Q3
 2019Q4
 2020Q1
 2020Q2
 2020Q3
 2020Q4
 2021Q1
 2021Q2
 2021Q3
 2021Q4
 2022Q1
 Below 1 per cent 1 to 2 per cent
 2 to 3 per cent Above 3 per cent

Per cent Per cent

2.5 14 Major wage settlements**
 Long-term break-even inflation rate*

 12
2.0
 10
1.5
 8
1.0 6

0.5 4

 2
0.0
 19-Sep-2018
 14-Dec-2018

 05-Sep-2019
 02-Dec-2019
 28-Feb-2020

 12-Feb-2021

 01-Feb-2022
 28-Mar-2018
 22-Jun-2018

 14-Mar-2019
 10-Jun-2019

 20-Aug-2020

 06-Aug-2021
 02-Jan-2018

 26-May-2020

 17-Nov-2020

 11-May-2021

 03-Nov-2021

 28-Apr-2022

 0
 1977Q1
 1979Q1
 1981Q1
 1983Q1
 1985Q1
 1987Q1
 1989Q1
 1991Q1
 1993Q1
 1995Q1
 1997Q1
 1999Q1
 2001Q1
 2003Q1
 2005Q1
 2007Q1
 2009Q1
 2011Q1
 2013Q1
 2015Q1
 2017Q1
 2019Q1
 2021Q1
 Sources: Bank of Canada, Statistics Canada and Office of the Parliamentary Budget
 Officer.
 Note: * Calculated as the nominal long-term Government of Canada benchmark
 bond minus the long-term real return bond rate. Last data point is May 31.
 ** All industries, average annual percentage adjustment. Last data point is
 2022Q1.

 16

Inflation Monitor – June 2022

2. Broad-based vs. concentrated
 inflation
 In its April 2022 Monetary Policy Report, the Bank of Canada noted that
 “price pressures are broadening, with about two-thirds of CPI components
 growing above 3%”, which is approximately double the share that existed
 prior to the pandemic.

 In this section we highlight a statistical measure of dispersion of price
 changes that captures the extent to which inflation is broad based or
 concentrated across consumer expenditure items.

 Personal Consumption Expenditure inflation
 Households may alter their consumption patterns when prices of goods and
 services change, or when new goods become available, which can distort the
 inflationary signal from a price index like the CPI.17 To control for some of
 the impacts of these types of shifts in consumption patterns, we use detailed
 personal consumption expenditure (PCE) data to construct our measure of
 inflation and the dispersion of price changes across expenditure items.18

 That said, the PCE measure of inflation is highly correlated with CPI inflation
 (Figure 2-1).19 There is, however, a discernable difference in the level of
 inflation rates over time: quarterly PCE inflation is 0.3 percentage points
 lower, on average, over 1991Q1-2022Q1. Despite this level discrepancy, our
 measure of dispersion still serves as a meaningful metric since it is based on
 the deviation from an average inflation rate.

 17

Inflation Monitor – June 2022

Figure 2-1 PCE and CPI inflation
 Per cent
 7
 CPI inflation
 6
 PCE inflation

 5

 4

 3

 2

 1

 0

 -1

 -2
 1991Q4

 1993Q4

 1995Q4

 1997Q4

 1999Q4

 2001Q4

 2003Q4

 2005Q4

 2007Q4

 2009Q4

 2011Q4

 2013Q4

 2015Q4

 2017Q4

 2019Q4

 2021Q4
 Sources: Statistics Canada and Office of the Parliamentary Budget Officer. The last data
 point shown is 2022Q1.

 In the first quarter of 2022, the top-ten contributors to PCE inflation
 accounted for 72 per cent of the inflation rate in that quarter and were
 above their pre-pandemic contribution levels (Figure 2-2). However, the
 difference between contributions over the two periods is not substantial,
 except for a few categories such as fuels and lubricants, food, and imputed
 rent. While looking at contributions to inflation provides an indication of the
 relative importance of specific consumer items, the standard deviation of
 price changes provides a more intuitive summary measure of the breadth of
 inflationary pressures.

 18

Inflation Monitor – June 2022

Figure 2-2 Top-10 contributors to PCE inflation in 2022Q1
 Percentage points
 1.0
 0.9
 0.8
 2022Q1
 0.7
 0.6 2018-2019 average
 0.5
 0.4
 0.3
 0.2
 0.1
 0.0
 -0.1

 Sources: Statistics Canada and Office of the Parliamentary Budget Officer.
 Note: The pre-pandemic period 2018Q1 to 2019Q4 is used as a reference point.

 Dispersion of price changes
 As noted above, the inflation rate represents the average price change of a
 basket of goods and services. The standard deviation of the price changes
 across expenditure items provides a natural measure of their dispersion (see
 Appendix A for additional detail).20

 If prices of items in the consumption basket are changing by similar
 amounts, the standard deviation is low, suggesting that inflation is broad
 based. However, if price changes are limited to a few items that account for
 a significant share of inflation, the standard deviation is high, suggesting that
 inflation is concentrated.21

 We use the average of the time series of the standard deviation to represent
 the “normal” degree of price change dispersion.22 That is, above-average
 values suggest that inflationary pressures are more concentrated; below
 average values suggest that inflationary pressures are broader based.

 Pre-pandemic experience suggests that both above- and below-average PCE
 inflation rates generally coincide with periods of higher concentration of
 price changes (Figure 2-3). This suggests that when inflation deviates from
 its average, price changes concentrated among relatively few items are a
 determining factor.23 Of course, there are exceptions to this result, such as
 the 1996Q2-1997Q2 period.

 During the pandemic, inflation initially fell well below its historical average as
 crude oil prices collapsed and the standard deviation of prices changes
 spiked in 2020Q2. Then, as inflation started to recover and rise above

 19

Inflation Monitor – June 2022

 average levels, the standard deviation of price changes spiked again and has
 remained elevated near historical highs. This suggests that inflationary
 pressures have been more concentrated across consumer expenditure items.

 Moreover, this finding would be consistent with the view that supply or
 sector-specific issues are a key driver of high inflation. Broader-based
 inflationary pressures would be more consistent with stronger aggregate
 demand as the primary driver of high inflation.24

Figure 2-3 Inflation and the dispersion of price increases
 Per cent, percentage points
 10
 PCE inflation (%) Standard deviation (% pts)
 Average (1995-2019) Average (1995-2019)
 8

 6

 4

 2

 0

 -2
 1995Q1
 1996Q1
 1997Q1
 1998Q1
 1999Q1
 2000Q1
 2001Q1
 2002Q1
 2003Q1
 2004Q1
 2005Q1
 2006Q1
 2007Q1
 2008Q1
 2009Q1
 2010Q1
 2011Q1
 2012Q1
 2013Q1
 2014Q1
 2015Q1
 2016Q1
 2017Q1
 2018Q1
 2019Q1
 2020Q1
 2021Q1
 2022Q1
 Sources: Statistics Canada and Office of the Parliamentary Budget Officer.

 A box plot is another tool that can be used to visualize the concentration of
 price pressures across expenditure items and to help identify outliers, that is,
 items where the magnitude of the price change is significantly different from
 that at the aggregate level. The dots, or circles, shown in the plot are
 calculated as the difference between inflation for a given item and the
 aggregate inflation rate, weighted by the share of that item in total
 consumer expenditure (that is, its “excess” contribution).

 Figure 2-4 indicates that the contribution of fuels and lubricants, and food in
 the first quarter of 2022 was markedly different from the pre-pandemic
 period.

 20

Inflation Monitor – June 2022

Figure 2-4 Contributors to inflationary pressures
 Weighted deviation from PCE inflation, percentage points

 Fuels and lubricants

 Food

 Gas
 Furniture and furnishings Food
 Electricity Tobacco

 Telecommunication services

 Telecommunication services
 Imputed rental housing

 Sources: Statistics Canada and Office of the Parliamentary Budget Officer.
 Note: The pre-pandemic period 2018Q1 to 2019Q4 is used as a reference point.

 Box plot
 A box plot shows the median, the 25% and 75% quantiles (called
 “quartiles”) and the “outliers”, defined as data points that are a fixed
 fraction away from the quartiles.*

 The figure below explains how to read a box plot.

 Source: https://waterdata.usgs.gov/blog/boxplots/
 * Le Boudec, J.-Y. (2021). Performance Evaluation of Computer and
 Communication Systems. EPFL. Retrieved from
 https://leboudec.github.io/perfeval/.

 21

Inflation Monitor – June 2022

Filtering out supply disruptions and sector-specific shocks
 Our finding that inflationary pressures have been more concentrated and
 less broad based is also consistent with the Bank of Canada’s “common
 component” (CPI-common) measure of core inflation. CPI-common uses a
 factor model to exploit “co-movements between individual prices
 comprising the Canadian CPI and minimizes the impact of sector-specific
 disturbances in extracting the signal in total CPI inflation”.25 As such, this
 measure of inflation should be less susceptible to supply disruptions.26

 Moreover, the wide gap between CPI-common and the Bank of Canada’s
 other preferred measures of core inflation suggests that supply disruptions
 and sector-specific factors are helping to push total CPI inflation to
 historically high levels (Figure 2-5).27 That said, CPI-common inflation has
 picked up noticeably since January and at 3.2 per cent in April 2022, exceeds
 the upper bound of the Bank of Canada’s inflation-control range, suggesting
 that strong aggregate demand is also putting upward pressure on inflation.

 Figure 2-5 Total CPI inflation and measures of core inflation
 Per cent Per cent

 8 8
 CPI-Median
 7 7
 CPI -Trim
 6 CPI-Common 6
 Total CPI
 5 5

 4 4

 3 3

 2 2

 1 1

 0 0

 -1 -1
 Jan-2019

 Apr-2019

 Oct-2019

 Jan-2020

 Apr-2020

 Oct-2020

 Jan-2021

 Apr-2021

 Oct-2021

 Jan-2022

 Apr-2022
 Jul-2019

 Jul-2020

 Jul-2021

 Sources: Bank of Canada, Statistics Canada and Office of the Parliamentary Budget
 Officer.

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Inflation Monitor – June 2022

 PCE inflation and dispersion
 of price changes
Personal consumption expenditure (PCE) data
Nominal and real (inflation-adjusted) personal consumption expenditure
data from the National Accounts were collected for individual categories
from 1990Q1 to 2022Q1 (Statistics Canada Table 36-10-0124). The
consumption basket of goods and services we use covers 97 categories. We
excluded the net expenditure abroad category to more closely align with the
structure of the CPI basket of goods and services.

Implicit prices
We derived implicit price indices P for each expenditure category series i (in
nominal and real terms) and each quarter t using the following equation:

 , 
 , =
 , 

The inflation rate π for each category is then calculated as the year-over-year
percentage change in the implicit price index.

 , 
 , = 100 × ( − 1)
 , −4

Basket weights
Basket weights w were calculated as the share of each category in total
nominal expenditures.

 , 
 , =
 ∑97
 =1 , 

PCE inflation rate
To construct total PCE inflation, we aggregate the inflation rates by category
weighted by their nominal expenditure shares.
 97

 = ∑ , −4 × , 
 =1

As a check on our data construction, we compare our measure of PCE
inflation with that derived using the total expenditure series (the “actual” PCE
inflation rate).28 That is, the above implicit price index using total nominal
expenditure and total real expenditure (excluding net expenditure abroad).
Figure A-1 shows that the two series are almost identical.

 23

Inflation Monitor – June 2022

Figure A-1 PCE inflation: actual versus constructed
 Per cent Per cent
 6 6
 Constructed PCE inflation Actual PCE inflation

 5 5

 4 4

 3 3

 2 2

 1 1

 0 0

 -1 -1

 -2 -2

 Sources: Statistics Canada and Office of the Parliamentary Budget Officer.

 Dispersion of price changes
 We use the standard deviation of price changes across expenditure
 categories σ as a measure of their dispersion. We follow the definition of the
 higher order moments of inflation in Kearns (1998)29 to calculate the
 standard deviation in each quarter.

 97
 2
 = √∑ , −4 × ( , − )
 =1

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Inflation Monitor – June 2022

 Notes
1. For example, see the Bank of Canada “Understanding Inflation”
 Explainer, available at:
 https://www.bankofcanada.ca/2020/08/understanding-inflation/.
 Unless otherwise noted, inflation rates in this report are calculated as the
 year-over-year percentage change in a price index.
2. See Statistics Canada’s Consumer Price Index Portal for additional detail
 at: https://www.statcan.gc.ca/en/subjects-
 start/prices_and_price_indexes/consumer_price_indexes.
3. For additional detail, please consult: https://www.bankofcanada.ca/core-
 functions/monetary-policy/.
4. The joint statement on the renewal of the monetary policy framework is
 available at: https://www.bankofcanada.ca/2021/12/joint-statement-of-
 the-government-of-canada-and-the-bank-of-canada-on-the-renewal-
 of-the-monetary-policy-framework/.
5. For additional detail, please consult:
 https://www.bankofcanada.ca/2021/05/understanding-consumer-price-
 index/#Baseyear-effects.
6. The February 2022 IMF Working Paper, “Supply Bottlenecks: Where,
 Why, How Much and What Next?” outlines key stylized facts of the
 repercussions of the pandemic, and also provides a conceptual
 framework for analyzing supply constraints. Available at:
 https://www.imf.org/en/Publications/WP/Issues/2022/02/15/Supply-
 Bottlenecks-Where-Why-How-Much-and-What-Next-513188.
7. See the Bank of Canada’s October 2021 and January 2022 Monetary
 Policy Reports for a discussion of the inflationary impacts of pandemic-
 related goods consumption and supply constraints in Canada. Available
 at: https://www.bankofcanada.ca/2021/10/mpr-2021-10-27/; and
 https://www.bankofcanada.ca/2022/01/mpr-2022-01-26/.
8. The Federal Reserve Bank of New York Global Supply Chain Pressure
 Index integrates a number of indicators, such as transportation costs and
 manufacturing data from purchasing manager surveys, “to provide a
 more comprehensive summary of potential disruptions affecting global
 supply chains”. For additional detail, see the article “A New Barometer
 of Global Supply Chain Pressures” available at:
 https://libertystreeteconomics.newyorkfed.org/2022/01/a-new-
 barometer-of-global-supply-chain-pressures/.
9. Bank of Canada analysis points to “[s]trong demand fundamentals,
 shifting preferences for more space, and limited supply of single-family
 homes” that together have contributed to the acceleration in house
 prices across Canadian cities. See Bank of Canada Staff Analytical Note
 2021-9, Detecting exuberance in house prices across Canadian cities.

 25

Inflation Monitor – June 2022

 Available at: https://www.bankofcanada.ca/2021/05/staff-analytical-
 note-2021-9/.
10. Statistics Canada derives replacement cost from data extracted from its
 annual Survey of Household Spending and applies a depreciation rate of
 1.5 per cent. For monthly changes in replacement cost, Statistics Canada
 uses its New Housing Price Index (house only). For additional detail, see
 Statistics Canada’s “Shelter in the Canadian CPI: An overview” available
 at: https://www150.statcan.gc.ca/n1/pub/62f0014m/62f0014m2017001-
 eng.htm.
11. Available at: https://www.oecd.org/sdd/prices-ppp/statistical-insights-
 why-is-inflation-so-high-now-in-the-largest-oecd-economies-a-
 statistical-analysis.htm.
12. For additional detail, see:
 https://www.canada.ca/en/services/benefits/publicpensions/cpp/old-
 age-security/payments.html.
13. There is a time lag in the indexation of OAS payments. For example, the
 monthly payment in April 2022 reflects the increase in the average level
 of total CPI in November 2021 to January 2022 relative to the average
 level in August 2021 to October 2021.
 In addition, OAS payments are not reduced if there is a decline in the
 CPI; payments are maintained at prior levels.
14. See: https://www.bankofcanada.ca/2022/04/mpr-2022-04-13/.
15. In the pre-pandemic period, consumers’ perceptions and expectations of
 inflation as measured by the Bank of Canada’s Canadian Survey of
 Consumer Expectations, were consistently higher than actual inflation as
 measured by the CPI. Analysis by Statistics Canada and Bank of Canada
 researchers examine factors that contribute to this gap. See:
 https://www150.statcan.gc.ca/n1/pub/62f0014m/62f0014m2021017-
 eng.htm.
16. See: https://www.bankofcanada.ca/2022/04/mpr-2022-04-13/.
17. These distortions are referred to as commodity-substitution and new-
 goods bias. For a discussion this and other biases in the CPI, see the
 Summer 2021 Bank of Canada Review article, Measurement Bias in the
 Canadian Consumer Price Index: An Update. Available at:
 https://www.bankofcanada.ca/wp-content/uploads/2012/08/boc-review-
 summer12-sabourin.pdf. To reduce the impact of some of the
 measurement biases, Statistics Canada has revised CPI weights more
 frequently (every two years instead of every four years).
18. Specifically, we use Statistics Canada’s detailed household final
 consumption expenditure data from Table 36-10-0124. The data are
 quarterly and implicit prices are calculated from nominal values using
 2012 constant dollar volumes.
 For a discussion of the differences between the CPI and PCE measures of
 inflation, see the September 2007 paper, Accounting for the Difference
 between the CPI and Personal Expenditure Price Index in Canada by
 Harchaoui, T. M., J. Hume and J. Withington. Available at:

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Inflation Monitor – June 2022

 https://www.ottawagroup.org/Ottawa/ottawagroup.nsf/home/Papers+-
 +Article+title.
 The detailed PCE volume data are constructed using constant, as
 opposed to chained, dollar volumes. Chained dollar volumes are limited
 to 39 commodity categories (excluding net expenditure abroad) and to
 maximize the number of commodity categories, we used the detailed
 constant dollar data, which include 97 commodity categories.
 As a check on our results, we constructed aggregate PCE inflation and
 standard deviations of PCE price changes using the chained volume
 series (Statistics Canada Table 36-10-0107) to derive implicit prices. The
 difference between aggregate constant dollar and chained dollar PCE
 inflation was, on average, 0.01 percentage points over 1995Q1 to
 2022Q1, with a correlation of 0.99. The correlation of the constant dollar
 and chained dollar standard deviation series over 1995Q1 to 2022Q1
 was 0.93.
19. Over 1991Q1 to 2022Q1, the correlation coefficient of the PCE and CPI
 inflation series is 0.93.
20. For a discussion of the statistical moments of inflation, see the Reserve
 Bank of Australia Research Discussion Paper 9810, The Distribution and
 Measurement of Inflation. Available at:
 https://www.rba.gov.au/publications/rdp/1998/pdf/rdp9810.pdf.
21. Recent analysis in The Economist used the standard deviation of price
 changes in the U.S. personal consumption expenditures index to gauge
 the concentration of inflationary pressures. See the 6 November 2021
 article, A handful of items are driving inflation in America. We thank the
 authors for providing additional detail regarding their analysis and have
 adopted their “broad-based” and “concentrated” inflation terminology.
22. This approach differs from that used in The Economist (see note 21),
 which developed a time series regression model to estimate the “excess”
 concentration of inflation. That is, the standard deviation of price
 changes relative to what one would expect based on overall inflation.
23. This is not an entirely surprising result given that large fluctuations in
 energy and food prices, typically drive swings in headline inflation rates
 such as the total CPI.
24. In constructing their measure of the common component of CPI
 inflation, Khan et al. note that “common movements in prices are more
 likely to reflect underlying inflationary pressures related to aggregate
 demand than sector-specific disturbances”. Bank of Canada Working
 Paper 2013-35, The Common Component of CPI: An Alternative
 Measure of Underlying Inflation for Canada:
 https://www.bankofcanada.ca/2013/10/working-paper-2013-35/.
25. See Bank of Canada Working Paper 2013-35, The Common Component
 of CPI: An Alternative Measure of Underlying Inflation for Canada.
 Available at: https://www.bankofcanada.ca/2013/10/working-paper-
 2013-35/.

 27

Inflation Monitor – June 2022

26. Indeed, in recent remarks, the Governor of the Bank of Canada noted
 that “CPI-common, which is more related to inflation in services and less
 influenced by global supply disruptions, was only 2.3% in January.”
 Available at: https://www.bankofcanada.ca/2022/03/economic-
 progress-report-controlling-inflation/.
27. In his March 3 remarks, the Governor of the Bank of Canada highlighted
 the gap between the preferred measures of core inflation, noting that
 “unusual forces” were at play.
28. We also constructed the aggregate inflation rate using current quarter
 (contemporaneous) weights and achieved similar results. Our
 constructed PCE inflation series based on lagged weights was marginally
 more highly correlated with the actual series. The standard deviation
 calculated using current quarter weights was virtually identical to our
 measure calculated with lagged weights.
29. See note 20.

 28