Inflation Update – April 2022

There are many things in the world that give a person a sense of pride and joy. Maybe it’s getting a hole in one on the golf course. Perhaps, it’s getting that promotion at work. Maybe it’s seeing those around you thrive. Or, maybe, it’s looking back in time and realizing your inflation prediction was right.

Now I am hesitant to say we were right, but I will say that we weren’t far off.

If you’re not sure what I am referring to, it’s inflation predictions from 2021. Inflation has been a topic we have talked about a lot over the past two years. Something that mainstream political talking heads were saying wasn’t a concern. And now, something they acknowledge and realize is more than just a possibility.

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Below we look at the most recent inflation report for Canada. We also look at our past forecasts from July 2021. Lastly, we give our take on what we think we could see going forward.

April 2022 Inflation Canada

Inflation is one of the most widely followed and reported economic statistics we have. It is a topic we have talked about many times:

Inflation is a calculation based on the change in the Consumer Price Index (CPI). The CPI is essentially a basket of goods and services, and inflation measures the change in the price of those goods and services.

The most recent inflation statistics for Canada were just announced. April saw a slight bump up in reported inflation over March. March saw annual inflation at 6.66% and April saw inflation at 6.77%. Below are two graphs that show the corresponding data.

Although Canada saw slower inflation through the end of 2021 compared to other countries, specifically our southern neighbors, it seems in 2022 we made up for the lost time. You can see that Feb-Apr, CPI has been running well above the trend of the last two years.

With higher CPI means higher reported inflation and man on man has it taken off. If we simply extend out the trendline for CPI, we see that we would end the 2022 year around 151-152, somewhere in the ballpark. If that ends up being the case, we would end 2022 with inflation around 5% – 5.5%.

However, how likely is that to happen? We still have supply chain breakdowns, political unrest, wars, natural disasters, fertilizer shortages, increasing interest rates, and who knows what else will develop. Will inflation actually stabilize or will it run rampant? We look at that more below.

There are a couple of notable items when it comes to inflation in Canada over the last year. The largest increases were in Food (8.8%), transportation (11.2%, specifically gasoline, 36.3%), Energy (26.4%), and non-durable goods (11.9%). The lowest increase was in clothing and footwear (0.2%), semi-durable goods (2.4%), and alcohol/tobacco (3.1%).

Looking Back

Before looking to the future, let’s look at what we said last year. Last summer we released two blog posts (here, and here), where we looked at the current inflation. We also went a step further and extrapolated that data and came up with a forecast of what inflation could look like through the end of 2021. Both of those articles were based on US data.

In the July inflation update, inflation had just hit 5.4% year-over-year. Oh man, what we would do to go back to a time with inflation that low! As mentioned above, the data used in the inflation updates from last summer were based on the US economy.

At the time of the July inflation report, political figureheads had finally conceded that inflation was in fact here, after months of saying inflation wasn’t a concern. However, they were only willing to admit that inflation was transitory, it wasn’t a long-term concern and it wasn’t here to stay. We disagreed. We also speculated that we could see inflation hit 6.7% by year-end in the US and that it could continue for some time.

Once again, we were right, however, we were actually too conservative. In the US, inflation ended 2021 being up more than 7%. Much higher than the previous peak in the early 90s.

Oh but don’t worry, inflation didn’t stop there. 2022 has been a world of “fun”. Inflation in April in the US was recorded at 8.3%. A slight easing after the March numbers were reported at 8.5%. The highest recorded inflation in around 40 years.

You can see in the chart above, starting in 2022, we broke above the trendline meaning inflation is continuing to increase more quickly than it has in the past two years, just like the chart for Canada showed earlier. If CPI reverts slightly back to the trend line, it should close out the year around 298. If that is the case, inflation would end 2022 at around 5.5%-5.7%. This would be just slightly higher than the trend line for Canada. However, this might not be the case, see below.

Maybe we are a little too conservative in our projections. Or, maybe we are too optimistic about the idea that central bankers have control of the economy.

Inflation Looking Forward

After months and months of us and others out there pounding the table and seemingly beating the dead inflation horse, telling people to be prepared for higher inflation, central banks seem to have finally caught up. But is it too little, too late?

Central bankers are now admitting that inflation is here, and it might be here for a while. Our contrarian side wants to say, that may not be the case. It’s like the old adage; when you start getting stock tips from the taxi driver, you know it’s time to sell. However, as unfortunate as it is, it is likely that we could see inflation stay at the current level or increase more yet.

Both the Bank of Canada and the Federal Reserve are saying, getting inflation under control is now their top priority. To do this, they are planning on raising interest rates. Our readers will know that this is because interest rates and inflation have a negative correlation.

Economists in the US are expecting a potential 9 rate hikes in the states for 2022, a total increase of 2.25%. The BoC is in much the same boat, maybe not sinking quite as fast in the inflation waters, with more rate hikes being priced in.

However, even with these rate hikes, it doesn’t get us anywhere close to the bank rates that were experienced in the 80s last time inflation was this high.

Taylor Rule

This is where the Taylor rule comes in. It helps us answer whether the Fed is on pace with its interest rates or if they are behind. The Taylor rule is a formula that can predict or guide how central banks should alter interest rates due to changes in the economy. Currently, the fed funds rate is 1%. Well, the Taylor rule says that isn’t anywhere close to where it should be. According to the formula, the rate should be over 11%. Yeah, best of luck raising rates to that level!

Potential Ongoing Inflation

So, the question is, where does this leave us going forward?

Below we have presented two potential scenarios for each Canada and the US. The first scenario is identical to the assumptions used last summer; a consistent 0.5% month-over-month increase in inflation in the US, and 0.4% in Canada. Note, prior to the April report, we had six straight months where inflation surpassed the 0.5% mark in the US. In Canada, five of the last seven months have had inflation reported above 0.4%.

The second scenario is a little more complex. In it, we used the 12-month rolling average change in CPI as the succeeding month’s monthly change. For example, to forecast May 2022, we took the average monthly change in CPI of the previous 12 months (May 2021 to April 2022) and used that as an increase for May.

For all scenarios, we projected it out until the end of 2022.

Canada Scenario #1

This scenario is the more conservative of the two scenarios with monthly inflation of 0.4%. If that was maintained over the long-term it would lead to 4.8% annual inflation. However, if we finish out the year with maintained 0.4% inflation we would have annual inflation of 7.6% in 2022.

This is well above the inflation target. Not only that, but we would have higher reported annual inflation in Canada than in the US if they maintained 0.5% monthly increases. This is due to how far behind Canada has lagged, and how “low” inflation was when we entered 2022.

Canada Scenario #2

This scenario is the more aggressive of the two. Using this set of assumptions, CPI would end the year just under 157. This would put annual inflation for December of 2022 at 8.9%. Nearly 0.2% higher than if we use the same assumptions in the US.

US Scenario #1

In the first chart below you can see CPI ends the year above the 300 mark. In the second chart, you also see that year-over-year inflation seems to tapper off and then increase a bit again before ending the year even lower. This is due to inflation being reported as fairly low for the period between July and October 2021.

If we assume this is accurate, it means inflation has peaked already. It would see inflation close out the year at around 7.2%. This is still well above the target of 2%.

US Scenario #2

This scenario sees inflation continue with its aggression. This would see CPI push past the 300 mark in October and end the year around the 304.5 level mark. As you can see in the second graph below, this would have an inflation peak in September and end the year at around 8.75%.

This type of projection (the one used in both of the second scenarios) is not perfect and only works over a short period. Over longer periods the rolling average eventually levels out and the value of this forecast diminishes.

There are alternatives where we could see inflation be lower or higher than we have used for our projections. Our scenario number 1’s are fairly conservative based on recent trends, and scenario 2’s are more aggressive. The reason we didn’t think it was worthwhile to show projections for inflation where monthly CPI increased at an even slower rate is that we have yet to see that trend.

Inflation pulled back slightly in the US and increased slightly in Canada for April. A trend implies two or more months. Once we see two or more months of inflation pulling back or decreasing, then that may become part of our projections.


In the end, it is clear that inflation is well above the central bank’s target. History would say that central banks should continue to increase rates to combat inflation. However, based on the Taylor rule, it seems that they waited too long to start the tightening process and are now far behind where they would need to be to make a marked impact.

Furthermore, now there are increased concerns about an upcoming recession. Recessions generally lead to central banks lowering interest rates. However, with rates still so low, they can’t really go much lower to help stave off recession concerns.

Now we have a conundrum on our hands. Do central banks raise rates to combat inflation? Or, do they reverse course and lower rates to combat a recession? Hmm… what to do, what to do? If I didn’t know any better I would say high inflation and low/no economic growth sound a lot like stagflation.

Central banks have said they will continue to raise rates, how long that will last is anyone’s guess. Once a recession hits, which may be sooner than they would like to admit, they may decide to reverse course and start to lower rates again. It is quite the conundrum they have found themselves in.

Regardless, predicting where inflation will or won’t go, and to what degree government and central bank intervention will help or hurt inflation is extremely complex and nearly impossible. The above information is not meant to scare, but merely to inform. We don’t know where inflation will go, but it is best to be well prepared and well-positioned. Like the saying goes; hope for the best, but prepare for the worst.

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