Commentaries Topics: Inflation

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

Canada’s headline Consumer Price Index inflation slowed to 6.3% year-over-year in December. The picture for core inflation remained the same, as food, shelter and services price growth were modestly improved.

The Bank of Canada has aggressively raised its policy rate by 4% since March. Their last announcement signaled a willingness to pause to assess the impact of these higher interest rates on the economy. However, given December’s stronger job gains and still elevated inflation expectations in the Bank’s business and consumer surveys, we expect the Bank of Canada to raise rates one last time next week — by 25 basis points, to end their tightening cycle at 4.5%.

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

KEY TAKEAWAYS

• Canada’s headline Consumer Price Index (CPI) inflation grew at a slower pace to 6.3% year-over-year in December.
  
• This is a noticeable improvement, and unfortunately, the picture for core inflation remains the same.
  
• The average of the Bank’s two preferred “core inflation” measures remained stable at 5.2% year-over-year.
  
• Food inflation remains broad-based. Grocery prices rose 11.0% year-over-year in December (down from 11.4% in October) and remains a major concern for consumers.
  
• Shelter costs slowed down noticeably to 7.0% (from 7.2% last month) as housing market shows signs of cooling.  However, rising mortgage rates (up 18.0% from 14.5% in November given a much higher Bank policy rate) and rents (5.8%, due to increased demand for rentals from those being priced out of owning a house) continue to put upward pressure on the CPI.
  
• Price increases for both goods and services slowed significantly to 6.9% and 5.6% respectively.
  
• Inflation decreased in all provinces. This month’s decrease was the most in Atlantic Canada driven by lower furnace fuel oil prices. In December, inflation was highest in Manitoba (8.0%) and lowest in Newfoundland and Labrador (5.7%).
  
• The Bank of Canada has aggressively raised its policy rate by 4% since March. Their last announcement signaled a willingness to pause to assess the impact of these higher interest rates on the economy. However, given December’s stronger job gains and still elevated inflation expectations in the Bank’s business and consumer surveys, we expect the Bank of Canada to raise rates one last time next week — by 25 basis points, to end their tightening cycle at 4.5%.

SUMMARY TABLES

INFLATION CHARTS

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Canada’s headline Consumer Price Index inflation slowed only modestly to 6.8% year-over-year in November. The picture for core inflation worsened, as food, shelter and services price growth accelerated.

The Bank of Canada’s last announcement signaled a willingness to pause to assess the impact of higher interest rates on the economy. However, if there are not stronger signals in next month’s data that inflation is decelerating, and in the Bank’s upcoming surveys that medium-term inflation expectations are moderating, don’t rule out a 25 basis-point hike in January.

Stephen Tapp, Chief Economist, Canadian Chamber of Commerce

Key Takeaways

• Canada’s headline Consumer Price Index (CPI) inflation slowed slightly to 6.8% year-over-year in November.
• This is only a modest improvement, and unfortunately, the picture for core inflation worsened.
  • The average of the Bank’s two preferred “core inflation” measures rose slightly to 5.2% year-over-year (from 5.1%).
  • We know the Bank is focused on short-run dynamics (i.e., forward-looking 3-month annualized measures, rather than backward-looking 12-month year-over-year rates) to get a better sense of underlying momentum in price growth. While these numbers aren’t publicly reported by StatsCan, estimates from Trevor Tombe (University of Calgary) suggest that the average of these two measures also increased in November. Both measures continue to run above the 3% threshold, representing the top of the Bank’s inflation control band.
• Food inflation remains broad-based. Grocery prices rose 11.4% year-over-year in November (up from 11.0% in October) and are a major concern for consumers.
• Shelter costs picked up noticeably to 7.2% (from 6.9% last month) because of rising mortgage rates (up 14.5% given a much higher Bank policy rate) and rents (5.9%, due to increased demand for rentals from those being priced out of owning a house).
• Price increases for goods slowed to 8.0%, but services inflation accelerated to 5.8%.
• Inflation increased in six provinces. This month’s increases were concentrated in Atlantic Canada driven by higher fuel oil costs. In November, inflation was highest in Prince Edward Island (9.7%) and lowest in Ontario (6.4%).
• The Bank of Canada has aggressively raised its policy rate by 4% since March. Their last announcement signaled a willingness to pause to assess the impact of these higher interest rates on the economy. However, if there are not stronger signals in next month’s inflation data and the Bank’s upcoming surveys that inflation is decelerating, don’t rule out a 25 basis-point hike.

Summary Tables

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Key Takeaways

• Today, the Bank of Canada raised its policy interest rate by 50 bps to 4.25%. This decision was a close call. Financial market participants were essentially split on whether the Bank would deliver another 50-basis point hike or drop down to 25 basis points.
• Ultimately, the Bank decided to remain hawkish because:
  1. Headline inflation in Canada is still far too high (6.9% year-over-year in October). Inflation remains broad-based across many frequently purchased goods and services, which makes it highly visible for everyday Canadians.
  2. Inflation expectations are elevated. In the Bank’s latest consumer and business surveys, most respondents expected inflation to remain above the top of the Bank’s inflation control band for the next two years. As the Bank notes, “The longer that consumers and businesses expect inflation to be above the target, the greater the risk that elevated inflation becomes entrenched.”
  3. Core inflation — which tries to measure underlying price pressure — is running above 5% on a year-over-year basis, even if the Bank is focused on more forward-looking, shorter-term core inflation measures, rather than the backward-looking year-over-year rate. The Bank’s shorter-term 3-month annualized core rates slowed to around 3.4% in October, which is a positive sign and suggests price pressures are losing momentum as the global economy slows. However, even if this slower recent core rate was maintained, inflation would remain above the top of the Bank’s target at the end of 2023.
• Terminal rate? By choosing a stronger move today, the Bank’s statement signals they are willing to pause their rate tightening cycle for now to assess the impact that their sharp rise in interest rates is having on the Canadian economy. Rate hikes made earlier in 2022 will continue to slow demand into 2023. Housing markets continue to correct, and final domestic demand fell in the third quarter. The Bank continues to expect economic growth in Canada to stall during 2022Q4 to 2023Q2.

Summary Table

My Twitter followers narrowly made the right call.

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Canada’s headline Consumer Price Index (CPI) inflation held steady at 6.9% year-over-year in October. While some forecasters expected headline inflation to bump back up to 7.0% due to rising gas prices, the Bank of Canada is unlikely to view today’s report as good news in their fight against inflation. Both core inflation measures increased on a year-over-year basis and the weak Canadian dollar is beginning to add inflationary pressure of its own. Expect another interest rate increase in December, with both 25- and 50-basis point options still on the table, which should take the policy rate to at least 4% by the end of the year.

Stephen Tapp, Chief Economist, Canadian Chamber of Commerce

Key Takeaways

• Canada’s headline Consumer Price Index (CPI) inflation held steady at 6.9% year-over-year in October.
• The average of the Bank of Canada’s two preferred “core inflation” measures rose to 5.1% year-over-year, with both components up by 0.1%. That said, the Bank will be watching shorter-run (i.e., 3-month, rather than 12-month) movements in core to get a better reading on the underlying trends.
• After dragging down headline inflation for several months, gasoline prices reversed course, rising 9% in October (18% year-over-year, after a 13% rise in September). OPEC+ has announced oil production cuts, and the weakening Canadian dollar (strengthening US dollar) is raising domestic prices.
• Food price growth edged down modestly (to 10.1% from 10.3%). Prices for meat, fruits and vegetables grew more slowly, but prices for dairy and eggs continued to rise after their governing boards approved price increases. Grocery prices are up 11% year-over-year and is a key concern for consumers.
• Shelter costs bumped up to 6.9% (from 6.8% last month). There are opposing forces at play here: sharply rising interest rates are raising mortgage costs (11% year-over-year) and rents continue to rise (5%), while the general cooling of the overall housing market slows inflation for new homes.
• Price increases for goods kicked back up to 8.4%, while services inflation finally turned the corner in the positive direction, slowing to 5.4%.
• The inflation rate rose in eight provinces. It is running noticeably hotter in the Prairies and BC but is slowing in Central Canada. In October, inflation was highest in Prince Edward Island (8.7%) and lowest in Quebec (6.4%).
• The Bank of Canada is unlikely to view today’s report as a sign of progress in their fight against inflation. Expect another interest rate increase in December, with both 25- and 50-basis point options still on the table, which should take the policy rate to at least 4% by the end of the year.

Summary Tables

Inflation Charts

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Canada’s headline inflation edged down for the third month in a row, dragged down by falling gas prices. However, these gains were largely offset by the continued rise of prices for food and services. Unfortunately, there was no progress on “core” inflation, which held steady at 5%.

Today’s lack of progress on inflation — together with Bank of Canada surveys released earlier this week that suggested inflation expectations remain elevated — should be concerning enough to the Bank of Canada for them to deliver the 50 basis-point interest rate hike that the market expects next week.

Stephen Tapp, Chief Economist, Canadian Chamber of Commerce

KEY TAKEAWAYS

• Canada’s headline Consumer Price Index (CPI) inflation edged down for the third month in a row month — to 6.9% year-over-year, down from record inflation in July of 8.1%. The slowdown in headline inflation was not as strong as the market expected (6.6%).

• The Bank of Canada’s two remaining “core inflation” measures held steady at5.0%. They are down only slightly from their peak of 5.2% in July.
  
• In September, energy price growth slowed (to 14% from 19%). Gasoline prices were a key driver of headline inflation and a major issue for consumers, especially this summer. They peaked in mid-June at $2.14 per litre and have since dropped back (currently at $1.74). Preliminary data for October suggest gas prices will only be up 8% year-over-year.
  
• Food prices kept rising (now up to 10.3% overall). Grocery prices are up across-the-board for a total of 11.4% year-over-year, the fastest pace since 1981!
  
• Price gains slowed for transportation (+9%), but new car prices remain strong reflecting decent demand and supply constraints due to the lingering semi-conductor shortages.
  
• Shelter costs rose by 6.8%, up from last month. There are opposing forces here with slowing house prices, while mortgage interest costs are rising alongside higher interest rates.
  
• Price increases for goods continue to slow (to 8.2% from 8.5%), which is expected, but the more significant move was the rise in services inflation (to 5.6% from 5.5%).
  
• The inflation rate fell in half of the provinces. It is highest in Prince Edward Island (8.4%) and lowest in Newfoundland and Labrador (6.1%).
  
• In coming months, headline inflation will likely decelerate further due to slowing growth and positive “base effects” (i.e., comparing 2022 readings with price levels that were rising fast in autumn 2021.) I expect October’s reading to be in the lower 6% range.
  
• That said, there’s still a long way to go before inflation returns to pre-pandemic levels of 2%. The Bank of Canada’s July Monetary Policy Report forecast CPI inflation of 7.2% in 2022, 4.6% in 2023, and 2.3% in 2024. Next week the Bank will likely revise down its inflation forecast for 2022 and 2023.
  
• Most market participants expect the Bank of Canada to deliver a 50-basis point rate hike next week. This would take the policy rate up to 3.75%, and potentially end the year at 4% after a smaller 25-bps increase in December.

SUMMARY TABLES

Canada’s headline inflation fell for the second straight month — this time by more than markets expected — but more importantly, core inflation and services measures finally started to slow. Today’s positive inflation developments, alongside slowing growth, weakening labour market data over the past three months, and rapidly tightening financial conditions, could tip the scale for the Bank of Canada to deliver a more restrained 25-basis point rate hike in October, which would still move their policy rate up to 3.50%.

Stephen Tapp, Chief Economist, Canadian Chamber of Commerce

Key Takeaways

• Canada’s headline Consumer Price Index (CPI) inflation slowed for the second straight month — to 7.0% year-over-year, down from its peak of over 8% in July. The slowdown in headline inflation exceeded market expectations (7.3%).
  

• The Bank of Canada’s “core inflation” measures declined by an average of 0.2 percentage points to 5.2%, as all three measures improved. This is great news for the central bank, providing the first tangible sign that underlying price pressures may have finally turned the corner, after six months of aggressively tightening interest rates.
  

• In August, energy price growth slowed (to 19% from 28%). Gasoline prices have been a key driver of headline inflation and a major issue for consumers. They peaked in mid-June at $2.14 per litre, and have since dropped back to $1.57, as global oil production has increased, and domestic refiners’ margins have fallen from elevated levels. Consumers will notice such an improvement (from 55% year-over-year price gains in June, down to 14% thus far in September), could push down the headline inflation figure again next month.
  
  
• Prices gains are also starting to slow for transportation (+10%, with car prices up 7%) and shelter costs (6.6%, reflecting the cooling of Canada’s over-heated housing markets, as interest rates rise to rein in inflation).
  
  
• Food prices are the only major category that kept rising (up 10%). As grocery shoppers can attest, prices are up painfully across the board — 11% year-over-year, the fastest pace since 1981!
  
  
• Price increases for goods continue to slow (to 8.5% from 9.6%), which is expected, but the more significant move is the slowdown in services inflation (to 5.5%, from 5.7%).
  
  
• The inflation rate fell in all 10 provinces. It is highest in Prince Edward Island (8.3%) and lowest in Alberta (6.0%).
  
  
• In the months ahead, momentum in inflation should decelerate further due to slower global growth, a deflating domestic housing market, and positive “base effects” (i.e., comparing 2022 inflation readings with price levels that had rebounded in Spring 2021.)
  
  
• That said, there’s still a long way to go before inflation returns to pre-pandemic levels of 2%. The Bank of Canada’s July Monetary Policy Report forecast CPI inflation of 7.2% in 2022, 4.6% in 2023, and 2.3% in 2024.
  
  
• With this positive development for inflation, alongside weakening labour market data over the past three months, slowing growth, and rapidly tightening financial conditions, today’s data could tip the scale for the Bank of Canada to deliver a more restrained 25-basis point rate hike in October, which would take their policy rate up to 3.50%.

Summary Tables

Inflation Charts

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Canada’s headline inflation finally showed signs of cooling, with total CPI slowing to 7.6% year-over-year in July. Gas prices continued to be a main driver — this month on the downside — but broader-based “core” inflation measures continued to rise, which means the Bank of Canada will continue to raise interest rates.

Stephen Tapp, Chief Economist

KEY TAKEAWAYS

• After an uncomfortably long and painful run, growth in Canada’s headline Consumer Price Index (CPI) inflation finally began to slow in July — falling to 7.6% year-over-year, down from its peak of 8.1% one month earlier. Much like in U.S. data, the summer slowdown is largely due to falling energy prices, as consumers enjoyed some relief from lower gas prices in the last two months.
• The inflation story continues to be written by dramatic price movements in a number of industries. Energy (28%, with gas prices up 36% year-over-year, despite their drop in July); transportation (+14%, passenger vehicle prices up 8%); and food (9.2%, with groceries up 10%). Shelter costs slowed (7.0%), reflecting the cooling of Canada’s housing markets, as interest rates rise to rein in inflation.
• Price increases for goods have also come down (still running at 9.6%). Services inflation accelerated to 5.7% (hotels 48%, airfares 26%). This is related to the summer travel boom to make up for lost time during the pandemic.
• The rate of inflation fell in eight provinces (BC and Saskatchewan being exceptions). It remains highest in PEI (9.5%) and lowest in Newfoundland and Labrador (6.9%).
• Notably, the average of the Bank of Canada’s “core inflation” measures rose to 5.3%. This will be a cause for concern for the central bank, suggesting that underlying price pressures are still strong.
• Over the pandemic, Canadian inflation has run at an average annual rate of 4.6% — terrible to be sure, but not quite as bad as the 5.8% in the United States.
• Looking ahead, gas prices have declined steadily since mid-June (from a peak of almost $2.15 per litre nationally to $1.75. It represents a drop from 50% year-over-year price gains in June to “only” about 25% so far in August). This inflation driver should continue to drag down the overall headline figure.
• More generally, in the months ahead, momentum in inflation should decelerate further due to falling energy prices, but also slower global growth, a deflating domestic housing market and positive “base effects” (i.e., comparing 2022 inflation readings with price levels that rebounded in the Spring of 2021.)
• Looking ahead, there is still likely a long way to go before inflation returns to pre-pandemic levels of 2%. The Bank of Canada’s July Monetary Policy Report forecasts CPI inflation of 7.2% in 2022, 4.6% in 2023, and 2.3% in 2024, essentially accepting a major overshoot in prices.
• As such, despite inflation’s belated positive turn, with core prices still rising, there is a strong case for the Bank of Canada to continue raising interest rates. The Bank’s nominal policy rate is finally back at a level which is considered “neutral” (2.5%). With inflation at 7.6%, the “real” policy rate is around -5% (still excessively stimulative). Longer-term inflation expectations are creeping up, and labour markets are as tight as at any point in recent history. To address this, the Bank’s policy rate will likely need to exceed the rate of inflation. This will come through a combination of rising interest rates and falling inflation, which entails sharply slowing demand growth, as supply continues to recover from the pandemic.

We are currently pencilling in a 50 basis point rate hike from the Bank of Canada in September. Additional hikes will continue, albeit at a slower pace, until core inflation shows continued and significant improvements, and/or the global economy materially falters.

SUMMARY TABLES

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