Commentaries /

June 2023 CPI: Base effects have peaked, but no real change in core measures

June 2023 CPI: Base effects have peaked, but no real change in core measures

As the first data release since last week’s interest rate announcement, June’s headline inflation reading marks the first time since March 2021 that annual inflation is back within the Bank of Canada’s 1% – 3% control range.

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Rewa

As the first data release following last week’s interest rate announcement, June’s headline inflation reading brings annual inflation back within the Bank of Canada’s control range of 1% to 3% for the first time since March 2021. Still, while the annual changes have slowed, it’s still too early to celebrate since most of the progress is from energy price base-effects from a year ago. Unfortunately, the stickiest and hardest part of the inflation fight is only just beginning.

Marwa Abdou, Senior Research Director, Canadian Chamber of Commerce

KEY TAKEAWAYS

Headline

  • Exceeding market expectations, Canada’s headline CPI inflation slowed in June to 2.8% on a year-over-year basis, below the anticipated 3.0%. The deceleration is primarily driven by base effects from a year ago, particularly in energy prices following the geopolitical situation between Russia and Ukraine. When excluding food and energy, prices rose by 3.5% compared to 4.0% in May.
  • While the headline puts us within the Bank of Canada’s inflation control target range overall, it doesn’t show much meaningful progress on core measures. Although it continues a positive trend with the lowest inflation rate in over two years, excluding gasoline from the calculations pushes inflation up to 4.0%, well above the upper end of the target range.
  • Mortgage interest costs and travel expenses continue to place a major dent on consumers’ wallets as the month-over-month CPI rose by 0.1% (compared to +0.4% in May).

CPI Components

  • Despite a slowdown in energy price growth, gasoline prices continue to drive down inflation with a 21.6% decline in June (following a drop of 18.3% in May). This reflects the base-year effects when global crude oil demand surged as China eased pandemic-related restrictions.
  • Transportation prices also fell by 3.4% in June (following a 2.4% decline in May). Much like energy, we saw base-year effects play out for passenger vehicle prices from a year prior where the sector had suffered from persistent supply chain and inventory challenges. Price increases slowed to +2.4% (compared to +3.2% in May).
  • If you are travelling, domestically or internationally, you are also likely to feel the weight of elevated prices. But the good news is that along with travel was also another area where we saw a deceleration in price increases as compared to the previous month (+6.8% vs.+23.4%). Still, this is not shocking as it falls in line with seasonal patterns that peak in July.
  • Grocery prices are still running hot (+9.1% yr/yr in June as compared to +9.0% May). Meat (+6.9%), baked goods (+12.9%), and dairy products (+7.4%) accounted for most of the rise.

Provincial inflation

  • A bright spot in the monthly report is that inflation slowed in 8 out of 10 provinces. Atlantic provinces continue to lead the way, with Prince Edward Island clocking in the lowest inflation of all (+0.2%). This too reflects those base effects as it had the largest decline in energy prices (-24.1%).

SENTIMENT, OUTLOOK & IMPLICATIONS

Bank of Canada

  • With last week’s BoC announcement to increase rates to a 22-year high of 5.0%, all eyes are on its two “core inflation” measures. Their average, while continuing to show very modest softening year-over-year, remains well above the target range — 3.8% vs. 3.9% in May. Unfortunately, shorter-term (3-month) core measures increased in June (also matching the 3.8%). Taken together, this indicates stalled progress on underlying inflation pressures, which is a major concern for the Bank.
  • The central bank, which cited excess demand, expects inflation to remain around 3% over the next year before dropping to its 2% target by mid-2025, six months later than previously anticipated. Unfortunately, we may have to get used to tight monetary policy, as the lagged effects of previous actions work their way through the economy.

SUMMARY TABLES

CPI CHARTS

Commentaries /

May 2023 CPI: Base effects overstate progress on slowing inflation

May 2023 CPI: Base effects overstate progress on slowing inflation

Headline inflation is finally looking better in Canada, down a full percentage point in May to 3.4% year-over-year. However, this...

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Business Data Lab

Headline inflation is finally looking better in Canada, down a full percentage point in May to 3.4% year-over-year. However, this progress is mostly a statistical mirage, because global commodity prices spiked last year when Russia invaded Ukraine. The Bank of Canada will not see enough in today’s release to feel confident that inflation will settle back down to 2% without more tightening. Therefore, I’m penciling in another 25 basis point hike in July, pending Friday’s GDP data and new BoC surveys.

Stephen Tapp, Chief Economist, Canadian Chamber of Commerce

KEY TAKEAWAYS

Headline

  • As markets expected, Canada’s headline CPI inflation slowed by a full percentage point in May to 3.4% on a year-over-year basis. The deceleration largely reflects lower gas prices, as compared with elevated levels one year ago. While still above the Bank of Canada’s inflation control target range, this is the lowest inflation rate in nearly two years.
  • On a month-over-month basis the CPI rose by 0.4%, pushed up by higher costs for mortgage interest and travel.

Key Drivers

  • Gas prices were a key driver of the slower headline inflation in May. They were 18% lower, compared with a year earlier when Russia’s invasion of Ukraine caused global price spikes for energy and other commodities.
  • Food inflation remains high and problematic for consumers (at 8.3%, unchanged from last month). In this category, grocery prices are up 9%, and restaurant meals picked up further to 6.8%, amid labour shortage and higher costs.
  • Mortgage interest costs are up a record 30%, as the Bank of Canada raises rates to control inflation. That said, overall shelter costs decelerated slightly to 4.7%, even as home prices are once again on the rise as the housing market picks up steam.
  • Services inflation slowed modestly to 4.6% (from 4.8% last month) but remains at worrying levels for the Bank of Canada. Goods inflation showed a bigger improvement slowing to 2.1% (from 4.0%), reflecting an easing of global supply chain problems since last year.
  • Inflation slowed in all provinces, particularly in Atlantic provinces due to lower prices for heating fuels.

Bank of Canada Interest Rates

  • The Bank of Canada’s two “core inflation” measures slowed to 3.9% year-over-year and continue to trend in the right direction.
  • Unfortunately, and more consequentially, shorter-term (three-month annualized) core is holding steady around 3.5% or higher.
  • This suggests the Bank of Canada will likely deliver another rate hike in July — although it’s too soon to place my bets, given that we will get an important Canadian GDP release and BoC surveys this Friday.

Taken together — and looking past the base-year effects that are overstating the actual progress on slowing down inflation pressures — the risks remain high that inflation will get stuck above the Bank’s target, without tighter monetary policy:

  • Short-run core inflation is still too high;
  • Wage pressures are sustained in a labour market with falling labour productivity that only started slowing in the last two months;
  • There have only been modest improvements for services prices and inflation expectations;
  • The housing market is bouncing back to life;
  • All this while businesses face broad-based cost pressures, which are preventing pricing behaviour from normalizing

SUMMARY TABLES

INFLATION CHARTS

Commentaries /

June 2023 CPI: Breaking its conditional pause, BoC issues a 25 basis point taking the overnight rate to 4.75%

June 2023 CPI: Breaking its conditional pause, BoC issues a 25 basis point taking the overnight rate to 4.75%

The Bank of Canada increased interest rates once again, after taking a short pause of only a few months.

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Rewa

Today, the Bank of Canada increased interest rates once again, after taking a short pause of only a few months. The increase of 25 basis points takes the overnight rate to 4.75%. After two stronger-than-expected reports by way of April’s inflation increase and Q1 2023’s GDP growth this decision is not shocking but was not expected until July when the Bank issues its next Monetary Policy Report. As the cumulative impact of past rate hikes continue to slow demand and inflation, this decision is proof that the Bank is resolute in its determination to return inflation to the 2% target

Marwa Abdou, Senior Research Director, Canadian Chamber of Commerce

SUMMARY TABLE

CHARTS

Commentaries /

May 2023 CPI: Canada’s inflation surprisingly edges up, breaking its chilly streak

May 2023 CPI: Canada’s inflation surprisingly edges up, breaking its chilly streak

Breaking an 8-month streak of cooling, Canada’s headline inflation edged up to 4.4%. This was higher than market expectations which predicted another drop from March’s 4.3%.

Author's image
Marwa Abdou

Breaking an 8-month streak of cooling, Canada’s headline inflation edged up to 4.4%. This was higher than market expectations which predicted another drop from March’s 4.3%. The acceleration in this report came by way of an increase in gas prices, rent and mortgage interest rate costs. As it continues to hold its policy rate at 4.5%, this surprising report will keep the Bank of Canada on greater alert, as we await its next announcement in early June.

Marwa Abdou, Senior Research Director, Canadian Chamber of Commerce

KEY TAKEAWAYS

Headline

  • Canada’s headline CPI inflation edged up to 4.4% year-over-year in April. This broke an almost three-quarter streak of cooling down from headline peak 8.1% last summer. The slowdown in headline inflation was well above market expectations (4.1%).
  • On a month-over-month basis, the CPI rose by 0.7% in April (compared to the 0.5% increase in March).

CPI Components

  • One bright spot in this report is that the spread of inflation continues to narrow across goods and services. Price increases for goods rose to 4.0% in April from 3.6% in March, whereas those in services declined to 4.8% from 5.1% a month prior. Still, it’s important to note that all but transportation prices (1.3% up from 0.3%) in the CPI basket are seeing inflation above the BoC’s 1% to 3% target range.
  • Another glimmer of light is that grocery (+9.1% yr/yr from 9.7% in March) and food prices (8.3% from +8.9% March) have finally started to loosen their grip on consumers’ wallets.
  • The largest contributor to the acceleration of this month’s headline number, gasoline rose prices in April by 6.3% – the largest m/m increase since October 2022. This surge in prices followed OPEC+’s April announcement representing the largest cut since the start of the pandemic and equivalent to 2% of global oil demand.
  • While mortgage costs were up by almost 29% yr/yr from April 2022, Canadians are seeing shelter costs decelerate a little – 4.9% yr/yr from 5.4% from last month.
  • Average hourly wages are still heating up past annual inflation rate at 5.2% in April. Wage growth has exceeded inflation over the past quarter – a pattern we’ve been avoiding for two years but something that will keep analysts watching for a wage-price spiral.

SENTIMENT, OUTLOOK & IMPLICATIONS

Bank of Canada

  • If there is another positive glimmer in healing an additional policy rate hike in early June, it’s that we saw the BoC’s two “core inflation” measures continue to soften to 4.2% vs. 4.5% in March. Progress in these measures remains mission critical to declaring victory in the fight against inflation.
  • The Bank expects inflation to dramatically step down to the 3% target range next month. That said, with shorter-term (three-month annualized) core inflation still running above 3.5%, the Bank will be thinking hard about whether additional rate hike(s) are needed to fully bring inflation under control.

SUMMARY TABLES

CPI CHARTS

Commentaries /

April 2023 CPI: It’s all about that base!

April 2023 CPI: It’s all about that base!

Canada’s inflation edged down for eighth consecutive month in March to 4.3%- the lowest headline since August 2021. While this report at face value is the kind of Spring green shoots that we’ve been anxiously awaiting, this sharp decline is led by falling energy prices and base effects from March of last year when the Russian invasion of Ukraine sent oil prices soaring.

Author's image
Rewa

Canada’s inflation edged down for the eighth consecutive month in March to 4.3%- the lowest headline since August 2021. While this report at face value is the kind of Spring green shoots that we’ve been anxiously awaiting, this sharp decline is led by falling energy prices and base effects from March of last year when the Russian invasion of Ukraine sent oil prices soaring.

The broad-based price declines needed are still not here, but there is welcomed and needed reprieve for Canadian businesses and consumers in March’s report, as the pace of price growth is settling down. With its announcement last week, the Bank of Canada is holding the line on further increases for the overnight rate, and it’s clear their strategy is paying off, and inflation is moving along their expectations to decelerate to 3% by Q2 2023.

Marwa Abdou, Senior Research Director, Canadian Chamber of Commerce

KEY TAKEAWAYS

Headline

  • Canada’s headline CPI inflation geared down to 4.3% year-over-year. This was the lowest headline since August 2021 and a sharp contrast from the 8.1% last summer. The slowdown in headline inflation was in line with market expectations.
  • On a month-over-month basis, the CPI rose by 0.5% in March (compared to the 0.4% increase in February) and was even slower on a seasonally adjusted basis (0.1%).
  • The spread of inflation is narrowing across goods and services.  Price increases for goods sharply slowed (to 3.6% from 5.3% in February). Those in services also edged down modestly (to 5.1% from 5.3% a month prior). Still, more than half of the categories in the CPI basket are still seeing inflation above the BoC’s 1% to 3% target range.
  • In March, energy price growth slowed (to 4.5% from 4.8% in February). Gasoline prices continue to be a strong contributor to driving down inflation with a 14% decline in March. This, however, reflects base-year effects from when gasoline rose 12% month over month because of supply uncertainty a year prior when Russia invaded Ukraine.

CPI Components

  • Food prices are still running hot (+8.9% yr/yr in March as compared to +9.7% February). As visits to the grocery store are still eating into consumer’s pockets, this welcomed slowdown comes by way of lower produce prices for fresh fruit and vegetables.
  • Shelter costs rose 5.4% yr/yr, up by 0.4% from last month. Mortgage interest costs surged 26% in March – the largest yearly increase on record!
  • Another noteworthy aspect of this month’s data is that the annual inflation rate was weaker than the growth in average hourly wages (5.3%). This is only the second month that wage growth exceeded inflation in the last two years.

Provincial Inflation

  • Another bright spot in the monthly report is that inflation slowed in all 10 provinces. Atlantic provinces New Brunswick (4.2%), Nova Scotia (4.6%), Prince Edward Island (3.9%) and Newfoundland and Labrador (3.4%) saw inflation slow the most.

SENTIMENT, OUTLOOK & IMPLICATIONS

Bank of Canada

  • The BoC’s two “core inflation” measures continued to soften – to 4.5% vs. 4.9% in February. Progress in these measures is mission critical to declaring victory in the fight against inflation.
  • A significant development since the early pandemic is that inflation is below the Bank’s nominal policy rate, which means that the real policy rate is now in positive territory, finally shifting to encouraging saving over spending.
  • Shorter-term (three-month) core inflation measures slowed to the low-3% range on an annualized basis. This is a positive development but remains above the top of the BoC’s inflation control band, suggesting it may be difficult to quickly get inflation back all the way to 2%.

Inflation Expectations

  • I am optimistic that, alongside the positive base effects and BoC’s continued quantitative tightening that the headline inflation will continue to decelerate in the coming months.
  • On the real-economy side, according to the BoC’s most recent surveys business and consumer inflation expectations are moderating, but the possibility of a recession continues to weigh on their economic outlooks.
  • For small businesses, a key question is: to what extent will higher interest rates and slowing consumer spending weigh on business sales growth? This is particularly the case for homeowners that are renewing home loans now at higher rates.
  • Canadian firms’ expectations for high inflation are also shaping their price setting, which in turn, may be keeping some underlying momentum in price growth.

SUMMARY TABLES

CPI CHARTS

Commentaries /

April 2023 CPI: Progress, but job not done yet: The BoC maintains its policy rate, no longer expects a recession in Canada

April 2023 CPI: Progress, but job not done yet: The BoC maintains its policy rate, no longer expects a recession in Canada

The Bank of Canada held its policy rate at 4.5% and renewed its commitment to bringing inflation back to the 2% target. Though inflation is declining, it remains well above target, and the economy is in excess demand.

Author's image
Rewa

The Bank of Canada held its policy rate at 4.5% and renewed its commitment to bringing inflation back to the 2% target. Though inflation is declining, it remains well above target, and the economy is in excess demand. The Bank expects Canada’s GDP growth to remain weak in 2023, but is no longer forecasting a recession in Canada.

Mahmoud Khairy, Economist, Canadian Chamber of Commerce

KEY TAKEAWAYS

  • The Bank of Canada held its policy rate: As expected, the Bank held its policy rate at 4.5%. This was the second consecutive hold during their “conditional pause” period (after previously hiking rates by a cumulative 4.25%). The Bank is also continuing its quantitative tightening policy.
  • Global economic outlook better than expected in 2023: Despite tighter monetary policy and banking sector stress in the U.S. and Europe, global economic data have been better than the Bank previously anticipated. The Bank, therefore, revised up its projection for world economic growth (to 2.6% from 1.9%), while revising down 2024 slightly (to 2.1% from 2.4%). That said, the U.S. economy is expected to be weaking in the coming quarters, mainly due to slower consumer spending and tightener credit condition.
  • Canada’s economy to grow modestly in 2023: Economic activity clearly slowed down over 2022, but the Bank still sees Canada’s economy as being in a position of “excess demand”. The good news is that with the bounce-back now expected for 2023Q1, the Bank is no longer forecasting a recession in Canada in 2023, and revised up its growth outlook from 1.0% to 1.4%.
  • Inflation progress, but job not done: Inflation has declined from its peak of 8.1% last summer to 5.2% most recently. The Bank will be encouraged by this progress and expects inflation to slow to 3% this summer, but the return to 2% could take longer than previously expected — now near the end of 2024.
  • The slowdown in inflation so far is largely due to falling prices for energy and other goods. Services prices have only really stabilized and will need to come down further for inflation to return to target. Food inflation remains high, and with a tight labour market, wages are growing at 4-5%, and may only ease slowly with continued labour supply growth.
  • The Bank highlighted five key progress indicators that it will be watching: inflation expectations, services inflation, wages, business pricing behavior, and core inflation. Governing Council reiterated that it, “remains prepared to raise the policy rate further if needed” to get inflation back to target. This should send a clearer message to financial markets that they shouldn’t expect the Bank rate to fall in 2023, as was previously priced in.

SUMMARY TABLE

Commentaries /

March 2023 CPI: Inflation continues to cool, mainly due to base-year effects

March 2023 CPI: Inflation continues to cool, mainly due to base-year effects

Canada’s headline inflation cooled more than expected in February to 5.2% year-over-year (more than market expectations of 5.4%), with core inflation also slowing to 4.9%.

Author's image
Mahmoud Khairy

Canada’s headline inflation cooled more than expected in February to 5.2% year-over-year (more than market expectations of 5.4%), with core inflation also slowing to 4.9%. This is largely due to base-year effects, with current prices being compared to elevated levels from a year ago when global commodity prices soared after Russia invaded Ukraine along with supply chain disruptions.

The Bank will welcome the slowdown in inflation, but notwithstanding this progress, there’s still a long way to get back to 2%. They will likely maintain their interest rate pause while they wait for more decisive evidence of slower core inflation.

– Mahmoud Khairy, Economist, Business Data Lab, Canadian Chamber of Commerce

KEY TAKEAWAYS

  • The Consumer Price Index (CPI) cooled down in February to 5.2% — more than markets expected (5.4%) — in what was the largest deceleration since April 2020. There was also a slight improvement in core inflation, as the average of the Bank of Canada’s preferred core inflation measures declined to 4.9% year-over-year. This notable decline is mainly due to so-called base-year effects; given the sharp rise in global commodity prices last year associated with Russia’s invasion of Ukraine, year-over-year inflation should continue to slow noticeably over the first half of 2023.
  • The slowdown in inflation was broad-based across most components; however, food prices continue to be a major burden on consumers.
  • Shelter costs cooled for the third straight month to 6.1% (from 6.6%). However, higher interest rates due to the Bank of Canada’s tightening policy has resulted in the biggest increase in mortgage rates since 1982. The mortgage interest cost index rose in February to 23.9% (from 21.2%).
  • Goods prices has slowed to 5.2% (from 6.4%), while prices for services remained stable at 5.3%.
  • Energy prices were actually down 0.6% on a year-over-year basis — again reflecting base-year effects after the Russian invasion to Ukraine has caused energy prices to spike in early 2022.
  • Inflation slowed in all provinces, except British Columbia where prices remained stable due to offsets from higher rents. Alberta had the fasted inflation slowdown because of lower energy prices as well as the national plan to reduce childcare costs.

SUMMARY TABLES

INFLATION CHARTS

Commentaries /

March 2023 CPI: The Bank of Canada becomes the first major central bank to pause interest rates hikes… but for how long?

March 2023 CPI: The Bank of Canada becomes the first major central bank to pause interest rates hikes… but for how long?

After one year of aggressively raising interest rates by a total of 4.25%, the Bank of Canada today held its policy rate steady — officially following through on the “conditional pause” in its tightening cycle.

Author's image
Rewa

After one year of aggressively raising interest rates by a total of 4.25%, the Bank of Canada today held its policy rate steady — officially following through on the “conditional pause” in its tightening cycle.

– Mahmoud Khairy, Economist, Canadian Chamber of Commerce Business Data Lab

KEY TAKEAWAYS

  • After eight consecutive rate increases, the Bank of Canada met market expectations and held for the first time in a year for the overnight rate at 4.5%, making it the first major central bank to stop raising interest rates.
  • Despite holding rates today, the Bank’s statement included a hint of hawkish bias by stating that, “Governing Council…is prepared to increase the policy rate further if needed.”  Pressure might build on the Bank of Canada over the coming quarters to resume rate hikes. This is because the U.S. Federal Reserve is widely expected to continuing raising rates to a noticeably higher level than Canada. A sustained interest rate differential could put downward pressure on the Canadian dollar, which in turn, would increase the costs of imports and add to Canadian inflation pressures.
  • Globally, recent data for the US and Europe have been slightly stronger than the Bank expected, and China’s economic rebound after relaxing its COVID-zero policies presents a new upside risk for commodity prices, and hence inflation.
  • In Canada, weaker-than-expected GDP growth in the fourth quarter of 2022 will not cause too much concern for the Bank, because it was due mainly to inventories, not underlying domestic demand. While inflation was running at 5.9% in January, the BoC expects it to decline to around 3% in the middle of this year and return to the 2% target in 2024. The labor market remains tight with the unemployment rate near a historic low. Wages are growing at around 4.5%, but labor productivity has been disappointing.
  • Though a soft landing in Canada remains possible, it is still too early to clearly know if the economy will avoid a significant rough patch this year. Going forward the BoC will be looking hard at incoming data for evidence that wage growth is moderating; businesses are inclined to raise prices; short-run core inflation is slowing; and finally, inflation expectations are back to the 2% target.

SUMMARY TABLES

Commentaries /

January 2023 CPI: Steady progress as inflation continues to slow

January 2023 CPI: Steady progress as inflation continues to slow

It was another step in the right direction as January’s data show inflation is slowly coming back under control.

Author's image
Mahmoud Khairy

It was another step in the right direction as January’s data show inflation is slowly coming back under control. Both headline and core inflation declined to 5.9% and 5.1% year-over-year, respectively. The decline was broad-based, however food prices and rising mortgage rates remain problem areas. While this is welcome news on the heels of the Bank of Canada’s pause in January, inflation remains well above target. Given stronger-than-expected job numbers, resilient household spending, and further rate increases planned in the U.S., the door is not completely closed on another BoC rate hike in March, but it remains unlikely.

KEY TAKEAWAYS

  • It was another month of progress in the Bank of Canada’s fight against inflation, as Canada’s headline Consumer Price Index (CPI) inflation grew at a slower pace of 5.9% year-over-year in January, which was better than the market expectation of 6.2%.
  • January’s data also show modest improvements for core inflation. The average of the Bank’s two preferred “core inflation” measures declined to 5.1% year-over-year.
  • Note that much of the slowdown in year-over-year inflation number in today’s data — and in the coming months — reflects “base-year effects”. Each month, new price data are being compared against the price level one year ago — and in early 2022, prices spiked up due to supply disruptions and uncertainty after Russia’s invasion of Ukraine.
  • Focusing on shorter-run core inflation (3-month annualized rates) right now provides better signals of underlying price pressures; they are around 3.5% — still too high, but much closer to the top of the Bank’s inflation target range.
  • Most major components of CPI inflation slowed in January, but food inflation accelerated (to 10.4%), and remains a significant burden for consumers. Both grocery and food from restaurants prices rose, mainly due strong demand and supply constraints.
  • Shelter cost inflation cooled for the third consecutive month to 6.6% overall (from 7.0% last month). However, there’s mounting upward pressure from rising mortgage rates (+21% yr/yr in January — the largest gain in over 40 years!) given the sharp increase in rates by the Bank of Canada.
  • Price increases for both goods and services slowed to 6.4% and 5.3% respectively. Cellular services prices fell by 8%, as Boxing Day deals extended into January.
  • Gasoline prices are a key driver at provincial level. It was the main reason for inflation slowing in nine of 10 provinces (and also the reason of increased inflation in New Brunswick). Alberta has the lowest inflation rate (5.0%, after electricity prices fell 46% on the month, related to provincial initiatives).

SUMMARY TABLES

INFLATION CHARTS

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Commentaries /

January 2023 CPI: The Bank is slowing tightening pace, becomes first major central bank to signal pause

January 2023 CPI: The Bank is slowing tightening pace, becomes first major central bank to signal pause

Though inflation shows signs of coming down, it remains triple the target rate as Canada’s economy also remains in excess demand. The 25-basis point hike came with some positive news.

Author's image
Mahmoud Khairy

Today’s Bank of Canada announcement marks its eighth interest rate hike bringing it to 4.50%. Though inflation shows signs of coming down, it remains triple the target rate as Canada’s economy also remains in excess demand. The 25-basis point hike came with some positive news – there would be a conditional hold on additional increases in the current cycle – making it the first major central bank to do so. The Bank’s decision reflects confidence that their tightening policy is successfully slowing down the economy as inflation turns a corner alongside lower energy prices and improvements in supply chains.

Mahmoud Khairy, Economist, Business Data Lab, Canadian Chamber of Commerce

KEY TAKEAWAYS

  • The Bank of Canada (BOC)’s policy rate is at its peak: Meeting market expectations, the BoC’s modest hike of 25 basis points (0.25%) brought interest rates today to 4.50% becoming the first major central bank to signal pause. With a cumulative record increase of 425 basis points, this brings the policy rate its highest level in over a decade and half. However, inflation is starting to fall as restrictive monetary policy is slowing activity, especially household spending.
  • Although December’s inflation data was welcomed relief, at 6.3% inflation remains too high and well above the BoC’s 2% target. Core inflation has also been sticky and lagging in sustained improvement. The Bank revealed that short-term inflation expectations in Canada have declined as the share of firms expecting large price increases has dropped. Still, it remains above the Bank’s inflation forecast. In contrast, long-term expectations for inflation remain in line with the BoC’s target.
  • Canadian inflation is declining from its recent peak: There was a significant downward revision to the Bank’s CPI inflation forecast in 2023. Inflation is now expected to be 3.6% in 2023 and return to the Bank’s 2% target in 2024. Most of this change is attributed to lower energy prices, improvements in global supply chains and the effects of higher interest rates moving through the economy.
  • The Bank revised upwards its global economic outlook: In its January Monetary Policy Report (MPR), the BoC revised upwards its economic projection for the global economy in 2023 (from 1.6% to 1.9%); led by stronger activity than initially anticipated, robust consumer spending, a tight labour market, easing of disruptions to commodity prices as well as global trade and an earlier-than-expected change in China’s “zero-COVID” policy. The Bank estimates global growth in 2024 to be lower than previous projections (2.4% from 2.6%).
  • Growth in the United States’ economy is still expected to remain flat in 2023 mostly because of rising interest rates and tighter financial conditions. The BoC expected this weak outlook to persist at least through the first half of 2023.
  • The Bank’s outlook for Canada’s economic growth has been revised down: Growth in Canada’s economy is now expected to be slightly better-than-anticipated in 2023 (1.0% from October’s projection of 0.9%). Conversely, the BoC revised down its projections for 2024 (1.8% from 2.0%). As such, the overall level of activity is slowing down over the projection. That said, non-energy commodity exports are expected to grow as supply chain restrictions ease. Oil and gas activity is expected to be moderate in 2023 before picking up again in 2024 with the completion of new expansion projects, which will offset slower consumer spending growth as interest rates rise alongside modest foreign demand.
  • The pace of economic growth is slowing but demand continues to exceed supply: Canada’s labour market is more resilient than anticipated. The labor market is still tight across a broad range of measures and improvements can already be seen on the supply chain channels. Still, as demand is still outpacing supply, the rise in policy rate is expected to “broaden and moderate” consumer spending on services (especially for housing and big-ticket items) and dampen investment spending in 2023.
  • Accordingly, the BoC is projecting growth to pick up later in 2023, reaching 2.50% in the second half of 2024 as the effect of interest rate increases fade, with the estimate of output gap between 0.5% and 1.5% in the fourth quarter of 2022 and 2023 which is more than was projected in the October MPR’s projection.

SUMMARY TABLES

MONETARY POLICY CHARTS

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