August Inflation Hotter Than Expected

Latest News Wing Kei (Winson) Lam 19 Sep

August Inflation Hotter Than Expected
Canada’s inflation rate accelerated more than expected for the second consecutive month, mainly driven by higher gasoline prices. This will not be a one-month wonder as gasoline prices rose further in September.

The consumer price index increased 4.0% in August from one year ago, the fastest pace since April, after a 3.3% rise in July. That’s faster than the median estimate of 3.8% in a Bloomberg survey of economists. Monthly, the index rose 0.4%, double expectations. Excluding gasoline, the CPI rose 4.1% in August, matching the 4.1% increase in July.

Canadian inflation is no longer trending downward, presenting problems for the Bank of Canada. The BoC’s preferred 3-month core measure rose by a whole percentage point to 4.5%. The incoming data highlight the challenges in this phase of the inflation fight.

In addition to facing higher energy prices, Canadians paid more for rent and mortgage interest in August. Moderating the all-items CPI were declines in prices for travel-related services and a minor increase in food prices compared with the previous month.

The CPI was up 0.4% in August, following a 0.6% gain in July. The monthly slowdown was mainly driven by travel tours (-6.4%) and air transportation (-6.9%), as prices fell month over month following the peak of summer travel demand in July.
Even more troubling was the rise in core inflation, which filters out components with extreme price fluctuations and is followed closely by the central bank. The so-called trim and median core rates also rose, averaging 4% from an upwardly revised 3.75% last month, exceeding the 3.7% pace expected by economists.

According to Bloomberg calculations, a three-month moving average of the measures that Governor Tiff Macklem has flagged as key to his team’s thinking rose by a full percentage point to an annualized pace of 4.49%.
Shelter prices were up 6.0% on a year-over-year basis in August after increasing 5.1% in July. The rent index led to faster shelter price growth, which rose 6.5% year over year nationally after a 5.5% gain in July. A higher interest rate environment may create barriers to homeownership and put upward pressure on the index. While rent prices accelerated in eight provinces, those with the fastest price growth were Newfoundland and Labrador (+8.4%), Alberta (+6.5%), Nova Scotia (+9.5%) and Manitoba (+6.1%).

The mortgage interest cost index also contributed to the acceleration in shelter prices, rising slightly faster in August (+30.9%) compared with July (+30.6%).

Although year-over-year price growth for groceries slowed in August, price levels remained elevated. On a year-over-year basis, prices for food purchased from stores rose 6.9% in August compared with an 8.5% increase in July.
Bottom Line

Roughly 50% of the prices in the CPI are growing more than 5%, which is still very concerning for the Bank of Canada. Market rates moved up meaningfully on the news. With the 5-year government bond yield well above 4%, fixed mortgage rates will increase this week. The odds of another 25 bps rate hike this fall have risen, but there is still another employment report and the September CPI release before the next announcement date on October 25th.

Gasoline prices in September thus far have already risen to 10% above year-ago levels, so September inflation is likely also high. The additional problem for the Bank of Canada is that core inflation measures have also risen and will likely remain sticky on the high side. This has increased the odds of another rate hike this year.

Mitigating the Bank’s inflation concerns is the slowdown in economic activity. Employment growth has slowed as the jobless rate rose to 5.5% and job vacancies fell. Excess demand has also fallen. Financial strains in the household, financial and business sectors are emerging as delinquency rates on non-mortgage debt have soared. A pause in BoC rate hikes is warranted, but if the economy starts to pick up again or core inflation continues to hold steady or rise, additional rate hikes cannot be ruled out.
Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

Home Sales Dipped Once Again Last Month In The Wake of Two Consecutive BoC Rate Hikes

Latest News Wing Kei (Winson) Lam 15 Sep

Home Sales Dipped Once Again Last Month In The Wake of Two Consecutive BoC Rate Hikes
Not surprisingly, buyers moved to the sidelines last month as the central bank took the overnight policy rate up to 5.0%. Home sales posted a 4.1% decline between July and August, well below the 10-year moving average shown in the chart below. However, on a year-over-year (y/y) basis, the number of transactions rose 5.3%.

The national sales data were depressed in August by declines in Greater Vancouver and the Fraser Valley, Montreal, Ottawa, Hamilton-Burlington, London and St. Thomas.
New Listings

The number of newly listed homes edged up 0.8% m/m in August, adding to the cumulative gain of more than 24% between March and July. New listings started 2023 at a 20-year low but are now closer to average levels. Recent survey data suggest pent-up supply is coming down the track as many homeowners reported they planned to their home in the next three years.

With sales falling and new listings edging up in August, the sales-to-new listings ratio eased to 56.2% compared to 59% in July and a peak of 67.4% in April. The measure is now closely aligned with its long-term average of 55.2%.

There were 3.4 months of inventory on a national basis at the end of August 2023, up from 3.2 months in July. While the measure is up a bit from its recent low of 3.1 months in May and June, it remains below the second half of 2022 and well below its long-term average of about five months.
Home Prices

The Aggregate Composite MLS® Home Price Index (HPI) edged up 0.4% on a month-over-month basis in August 2023— only about half as large as the July gain, which was only nearly half as large as the gains recorded in April, May, and June. This leveling off of prices aligns with slowing sales and a rebound in listings.

While prices are stabilizing at the national level, regional differences are re-emerging. Price growth has remained solid in Quebec and the East Coast, followed by British Columbia and the Prairies. Ontario is now a mixed bag, with some of the more significant increases and some of the bigger declines.

As of August 2023, the Aggregate Composite MLS® HPI was up 0.4% y/y. This was the first year-over-year increase since September 2022. Even though prices appear to be leveling out near current levels, year-over-year comparisons will likely continue to rise in the months ahead because of how prices continued to decline through the second half of 2022.
Bottom Line

With the Bank of Canada moving to the sidelines and more supply gradually coming on board, housing activity will likely pick up in the coming months. Year-over-year home prices will rise owing to base effects, as lower prices were posted in the fall and winter of last year, making the y/y comparisons more favourable. We don’t want to see a burst of activity because that could cause the central bank to rethink its rate pause.

Housing affordability remains a significant problem for buyers, but recent data released for the second quarter shows an uptick in first-time purchases despite the affordability crunch.

The housing shortage and the resulting high cost of rent and buying are political issues at all levels of government. On Thursday, Prime Minister Trudeau pledged to cut the federal Goods and Services tax on constructing new apartment buildings as part of a promised host of measures to address affordability issues. Canadians are used to such actions by the feds, but the housing shortage will only worsen until municipalities address impediments to densification, building delays, and development costs.
Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

Bank of Canada Holds Rates Steady Acknowledging Economic Slowdown

Latest News Wing Kei (Winson) Lam 8 Sep

Bank of Canada Holds Rates Steady Acknowledging Economic Slowdown
With last Friday’s publication of the anemic second-quarter GDP data, it was obvious that the Bank of Canada would refrain from raising rates at today’s meeting. Economic activity declined by 0.2% in Q2; the first quarter growth estimate decreased from 3.1% to 2.6%.

Today’s press release announced, “The Canadian economy has entered a period of weaker growth, which is needed to relieve price pressures.” The Q2 slowdown in output reflected a “marked weakening in consumption growth and a decline in housing activity, as well as the impact of wildfires in many regions of the country. Household credit growth slowed as the impact of higher rates restrained spending among a wider range of borrowers. Final domestic demand grew by 1% in the second quarter, supported by government spending and a boost to business investment. The tightness in the labour market has continued to ease gradually. However, wage growth has remained around 4% to 5%.”

Lest we get too comfy with a more dovish stance in monetary policy, the central bank warned that the Governing Council remains resolute in its commitment to restoring price stability.
Inflationary pressures remain broad-based. CPI inflation rose to 3.3% in July after falling to 2.8% in June. Much of the rise in July was caused by the statistical base effect. Nevertheless, current harbingers of inflation remain troubling. The increase in gasoline prices in August will boost inflation soon before easing again. “Year-over-year and three-month measures of core inflation are now running at about 3.5%, indicating little recent downward momentum in underlying inflation. The longer high inflation persists, the greater the risk that elevated inflation becomes entrenched, making it more difficult to restore price stability.”

The Bank also continues to normalize its balance sheet by letting maturing bonds run off. This quantitative tightening keeps upward pressure on longer-term interest rates.

Tiff Macklem and company concede that excess demand is diminishing and the labour markets are easing. The unemployment rate rose to 5.5% in July, up from a cycle low of 4.9%, and job vacancies continue to decline. Net exports have slowed, and the Chinese economy has weakened sharply. Consumers are tightening their belts as the saving rate rose and household spending slowed markedly in Q1.

Monetary policy actions have a lagged effect on the economy. As mortgage renewals rise, peaking in 2026, the economic impact of higher interest rates will grow. Homeowners renewing mortgages this year are seeing roughly a doubling in interest rates.

The Governing Council will focus on the movement in excess demand, inflation expectations, wage growth and corporate price decisions.

Bottom Line

The Bank of Canada, though independent, is coming under increasing political pressure. In an unusual move, the premiers of both BC and Ontario have publicly called for a cessation of rate hikes. Even so, the BoC is keeping its hawkish bias to avoid a bond rally that could trigger another boost in the housing market, similar to what we saw last April. The government bond yield is hovering just under 5%, having breached that level recently with the release of robust US economic data.

There are two more meetings before the end of this year, and many are expecting another rate hike in one of those meetings. The odds of this are less than even, given the downward momentum in the economy.

The central bank’s next decision is due October 25, after two releases of jobs, inflation and retail data, gross domestic product numbers for July and an August estimate.
Join myself and President Eddy Cocciollo LIVE for In Conversation at 11:30AM PT | 2:30PM ET to chat about this latest Bank of Canada decision – and more! 
CLICK HERE TO TUNE IN
Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

August Jobs Report Beat Expectations

Latest News Wing Kei (Winson) Lam 8 Sep

August Jobs Report Beat Expectations
Following a marked decline in employment in July, Statistics Canada reported a gain of 40,000 net new jobs in August. Hiring increased in professional, scientific and technical services and construction and declined in educational services and manufacturing. Population growth outpaced the growth in net new employment, depressing the employment rate to 61.9%.
The unemployment rate in Canada was at 5.5% in August, unchanged from the 18-month high from the previous month and slightly below the market estimate of 5.6%. The data consolidated evidence of some softening in the Canadian labour market since the prior year, but the jobless rate remains well below pre-pandemic averages, and the labour market is tight compared to historical levels. Nevertheless, job vacancies are trending downward, and the ratio of unemployment to job vacancies is rising.

Since the beginning of the year, average monthly employment gains are running at about 25,000, while the working age population is growing at 81,000. The surge in immigration warrants a larger than historically normal pace of job growth to maintain any given level of unemployment.

The Bank of Canada paused rate hikes last week saying that excess demand is falling. Today’s employment growth–though stronger than expected–is consistent with that point of view.
Policymakers will continue to scrutinize incoming economic data to determine if the current interest rates are sufficiently high to return inflation to 2%. They are particularly concerned about substantial wage gains, which perpetuate the wage-price spiralling. Today’s release showed year-over-year wage increases of 4.8%, only slightly below last month’s reading. But with the increasing number of new labour-market entrants, wage pressures are likely to diminish in coming months.
Bottom Line

The next BoC announcement date is October 25. There is another Labour Market Survey and two CPI reports before that date, but anecdotal evidence suggests that the economy is indeed slowing and we are near the end of the monetary tightening rate cycle.
Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

Rate Hikes Are Definitely Off The Table

Latest News Wing Kei (Winson) Lam 1 Sep

Rate Hikes Are Definitely Off The Table
The Canadian economy weakened surprisingly more in the second quarter than the market and the Bank of Canada expected. Real GDP edged downward by a 0.2% annual rate in Q2. The consensus was looking for a 1.2% rise. The modest decline followed a downwardly revised 2.6% growth pace in Q1. (Originally, Q1 growth was posted at 3.1%.) According to the latest monthly data, growth dipped by 0.2% in June, and the advance estimate for economic growth in July was essentially unchanged. This implies that the third quarter got off to a weak start.

The Bank of Canada forecasted growth of 1.5% in Q2 and Q3 in its latest Monetary Policy Report released in July. The central bank is now justified in pausing interest rate hikes when it meets again on September 6th. Today’s report is consistent with the recent rise in unemployment. It suggests that excess demand is diminishing, even when accounting for such special dampening factors as the expansive wildfires and the BC port strike.

Some details of Q2 Growth

Housing investment fell 2.1% in Q2, the fifth consecutive quarterly decline, led by a sharp drop in new construction and renovations. No surprise, given the higher borrowing costs and lower demand for mortgage funds, as the BoC raised the overnight rate to 4.75% in Q2. Despite higher mortgage rates, home resale activity rose in Q2, posting the first increase since the last quarter of 2021.

Significantly, the growth in consumer spending slowed appreciably in Q2 and was revised downward in Q1.
Bottom Line

The weakness in today’s data release may be a harbinger of the peak in interest rates. Inflation is still an issue, but the 5% policy rate should be high enough to return inflation to its 2% target in the next year or so. As annual mortgage renewals peak in 2026, the increase in monthly payments will further slow economic activity and break the back of inflation.

The Bank of Canada will be slow to ease monetary policy, cutting rates only gradually–likely beginning in the middle of next year. In the meantime, the central bank will continue to assert its determination to do whatever it takes to achieve sustained disinflationary forces.

Today’s release of the US jobs report for August supports the view that the Canadian overnight rate has peaked at 5%. (The Canadian jobs report is due next Friday). Though the headline number of job gains in the US came in at a higher-than-expected 187,000, the unemployment rate rose to 3.8% as labour force participation picked up, growth in hourly wages was modest, and job gains in June and July were revised downward.

In Canada, 5-year bond yields have fallen to 3.83%, well below their recent peak shown in the chart below.
Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

Housing Market Sales Dipped in July, Spooked By Rate Hikes

General Wing Kei (Winson) Lam 16 Aug

Housing Market Sales Dipped in July, Spooked By Rate Hikes
According to Shaun Cathcart, the Canadian Real Estate Association’s Senior Economist, “Following a brief surge of activity in April, housing markets have settled down in recent months, with price growth now also moderating with its usual slight lag. Sales and price growth are already showing signs of tapering off further in August in response to the Bank of Canada’s mid-July rate hike and messaging regarding above-target inflation for longer than previously expected. We’re probably looking at another round of back to the sidelines for some buyers until there’s a higher level of certainty around interest rates going forward.”

The good news is that the July inflation data, released today, will likely keep the Bank of Canada on the sidelines as core inflation has finally begun to slow. A host of economic indicators also point to Q2 GDP growth–released September 1–slowing to around 1% following the stronger-than-expected 3.1% growth in the first quarter. Labour market tightening eased in July with the decline in employment, rise in unemployment and continued downtrend in job vacancies. The central bank also welcomes the slowdown in the housing market.

Home sales recorded over Canadian MLS® Systems posted a small 0.7% decline between June and July 2023. Activity has been showing signs of stabilizing since May. While sales increased in July in more than half of all local markets, a decline in the Greater Toronto Area (GTA) tipped the national figure slightly negative. Sales were also down in the Fraser Valley, which, together with the GTA, offset gains in Montreal, Edmonton and Calgary.
New ListingsThe number of newly listed homes was up 5.6% monthly in July. Building on gains of 2.8% in April, 7.9% in May, and 5.9% in June, new listings have gone from a 20-year low in March to closer to (but still below) average levels by mid-summer.

With new listings outperforming sales in July, the sales-to-new listings ratio eased to 59.2% compared to 63% in June and a recent peak of 68% in April. That said, the measure remains above the long-term average of 55.2%.

There were 3.2 months of inventory nationally at the end of July 2023, up slightly from 3.1 months in May and June.

While this was the first month-over-month increase since January, this measure is still a full month below where it was at the beginning of 2023 and almost two months below the long-term average for this measure (about five months).
Home Prices

The Aggregate Composite MLS® Home Price Index (HPI) climbed 1.1% month-over-month in July 2023—a larger-than-normal increase for a single month but only about half as large as the gains recorded in April, May, and June. This aligns with sales having leveled off as new listings have been recovering.

Despite the smaller gain at the national level, a monthly price increase between June and July was still observed in most local markets, as has been the case since April.

The Aggregate Composite MLS® HPI now sits just 1.5% below year-ago levels, the smallest decline since October 2022. Year-over-year comparisons will likely tip back into positive territory in the months ahead because prices continued to decline through the second half of 2022.
Bottom Line

With interest stabilizing, housing activity will gradually increase as more supply comes onto the market. The Bank of Canada will likely cut rates in 25 bps increments by June next year. Without a doubt, that will be good news for the housing market.

There remains huge excess demand for housing due to the rapid population growth. While the federal and provincial governments are working hard to increase the supply of affordable housing, the process is painfully slow and is unlikely to come close to the demand for homes for purchase or rent for the foreseeable future.
Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

July Headline Inflation Rose to 3.3%, But Core Inflation Improved

Latest News Wing Kei (Winson) Lam 16 Aug

July Headline Inflation Rose to 3.3%, But Core Inflation Improved
The Consumer Price Index (CPI) rose 3.3% y/y in July, up from a 2.8% rise in June. The acceleration in headline inflation was widely expected due to a base-year effect on gasoline prices, as a sizeable monthly decline in July 2022 (-9.2%) no longer impacts the 12-month movement. Excluding gasoline, the CPI rose 4.1% from 4.0% in June.

The mortgage interest cost index (+30.6%) posted another record year-over-year gain and remained the most significant contributor to headline inflation. The all-items excluding mortgage interest cost index rose 2.4% in July.

The CPI rose 0.6% in July, following a 0.1% gain in June, mainly due to higher monthly prices for travel tours, with July being a peak travel month. On a seasonally adjusted monthly basis, the CPI rose 0.5%.

Food price inflation eased last month but remains sticky.​
The core inflation measures will hearten the Bank of Canada. CPI-trim eased to 3.6% y/y in July, continuing the downtrend following the November 2022 peak. CPI-median held steady at 3.7%.

The sizable slowdown in other economic indicators suggests that Q2 GDP growth slowed to roughly 1.0% in the second quarter–markedly below the 3.1% pace posted in Q1. Labour markets are also easing with a meaningful drop in job vacancies and a rising unemployment rate.
Bottom Line

It is now likely that when the Bank of Canada meets again on September 6, the Governing Council will announce a pause in rate hikes. They will promise to remain ever vigilant, but there is a good chance that the overnight policy rate has peaked at 5%–up 1900% since March 2022.

We will unlikely see the first drop in the policy rate until June of next year. The Bank will proceed slowly, taking rates down by 25 bp increments. The low in the policy rate will probably be around 3%, well above the pre-pandemic level of 1.75%.
Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

The Long-Awaited Labour Market Slowdown

Latest News Wing Kei (Winson) Lam 4 Aug

The Long-Awaited Labour Market Slowdown
The Canadian economy shed 6,400 jobs in July, far weaker than the 25,000 gain that was expected. The jobless rate was 5.5%, the third consecutive monthly rise. This likely improves the chances the Bank of Canada will remain on the sidelines in September.

Wage inflation, however, re-accelerated, moving back to 5.0%. This, combined with the continued stickiness in core inflation, will keep interest rates high for longer.

July’s data follows a surprise gain of 59,900 in June and a 17,300 loss in May, showing that employment is a notoriously volatile series. Nevertheless, it provides the fodder for Macklem to pause again after two consecutive rate hikes.
A downturn in June’s manufacturing, wholesale, and retail data has buoyed the Bank’s hopes that the 475 basis point rate hikes have slowed the economy, especially as preliminary figures for June showed the economy contracting for the first time this year. Inflation rates for the same month moderated to 2.8%, fitting within the central bank’s target range for the first time since March 2021.
Policymakers scrutinize indicators to determine if the current interest rates are sufficiently high to temper economic growth. They perceive substantial wage increases as inconsistent with their goal of reducing inflation to the 2% target. Even amidst recent significant strikes from workers demanding improved remuneration, the outlook hints at a potential slowdown in wage growth. This could be driven by increased immigration, which expands the workforce while the demand for labour diminishes.
Bottom Line

The chances of a rate hike on September 6 have diminished significantly. However, more data is yet to come with July inflation on August 15 and the Q2 GDP figure on September 1.
Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

Canadian Inflation Falls Within Bank of Canada’s Target Range

Latest News Wing Kei (Winson) Lam 19 Jul

Canadian Inflation Falls Within Bank of Canada’s Target Range; Food and Shelter Costs Remain High
June inflation data released today by Statistics Canada showed that the Consumer Price Index (CPI) rose 2.8% year-over-year (y/y), slightly below expectations. This was the lowest CPI reading since February 2022.

The decline in inflation was mainly due to lower energy prices, which fell by 21.6% y/y. Without this decline, headline CPI inflation would have been 4.0%. The year-over-year decrease resulted from elevated prices in June 2022 amid higher global demand for crude oil as China, the largest importer of crude oil, eased some COVID-19 public health restrictions. In June 2023, consumers paid 1.9% more at the pump compared with May.

Food and shelter costs remained the two most significant contributors to inflation, rising by 9.1% y/y and 4.8% y/y, respectively. Food prices at stores have risen nearly 20% in the past two years, the most significant rise in over 40 years. Shelter inflation rose slightly from 4.7% y/y in May.

The largest contributors within the food component were meat (+6.9%), bakery products (+12.9%), dairy products (+7.4%) and other food preparations (+10.2%). Fresh fruit prices grew at a faster pace year over year in June (+10.4%) than in May (+5.7%), driven, in part, by a 30.0% month-over-month increase in the price of grapes.

Food purchased from restaurants continued to contribute to the headline CPI increase, albeit at a slower year-over-year pace in June (+6.6%) than in May (+6.8%).

Services inflation cooled to 4.2% y/y from 4.8% y/y in May. This was due to smaller increases in travel tours and cellular services.

The Bank of Canada’s target range for inflation is 1% to 3%. While June’s inflation reading was within the target range, it is still higher than the Bank would like. The Bank raised the overnight policy rate twice in the past two months to reduce the stickier elements of inflation.

There were signs of easing price pressures for consumer goods also. Durable goods inflation continued to cool to 0.8% y/y in June. Passenger vehicle prices rose slower in June (+2.4%) than in May (+3.2%). The year-over-year slowdown resulted from a base-year effect, with a 1.5% month-over-month increase in June 2022 replaced with a more minor 0.6% month-over-month increase in June 2023. This coincided with improved supply chains and inventories compared with a year ago. Household furniture and equipment was up only 0.1% y/y in June, down from a peak of 10.5% last June.

The June inflation data provides some relief to consumers, but it is clear that food and shelter costs remain a major concern. The Bank of Canada will closely monitor inflation in the coming months to see if it is on track to return to its 2% target. There is another CPI report before the Bank meets again on September 6th.

The Bank of Canada’s underlying inflation measures cooled further in May. CPI-trim eased to 3.7%y/y in June from 3.8% y/y in May, and CPI-median registered 3.9% versus 4.0% y/y in May. The chart below shows the closely watched measure of underlying price pressures, the three-month moving average annualized of the core measures of CPI. They continue to be just under 4%.

Canadian inflation continued to make encouraging progress in June. However, the cooling in headline inflation benefits from sizeable base effects due to the favourable comparison to high energy prices last June. The Bank of Canada (BoC) is watching its preferred core measures, which continue to show glacial progress.

Bottom Line

It takes time for the full effect of interest rate hikes to feed into the CPI. Mortgage interest costs will continue to rise as higher interest rates flow gradually through to household mortgage payments with a lag as contracts are renewed.

BoC Governor Macklem emphasized last week that the Bank has become worried about the persistence of underlying inflation pressures in the economy. The June inflation data likely provides some reassurance that things are moving in the right direction, but not fast enough for the Bank of Canada to let its guard down.

The BoC is facing a difficult balancing act. It needs to raise interest rates enough to bring inflation under control, but it also needs to be careful not to raise rates so high that it causes a recession. The next few months will be critical for the BoC as it assesses the risks of inflation and recession.
Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

Canada’s inflation rate falls to 2.8%

General Wing Kei (Winson) Lam 18 Jul

Canada’s inflation rate falls to 2.8%

Gasoline pulling rate down, while food and mortgages pushing it up

Pete Evans · CBC News · Posted: Jul 18, 2023 5:40 AM PDT | Last Updated: 5 minutes ago
The silhouette of a man pumping gas is shown.
Gasoline prices were the biggest factor pulling down the inflation rate in the year up to June. If they are stripped out of the numbers, the inflation rate would have been four per cent. (David Paul Morris/Bloomberg)

Canada’s inflation rate fell to 2.8 per cent in June, its lowest level in more than two years.

Statistics Canada said a sharp decline in the price of gasoline compared with this time last year was the biggest reason for the drop, which brought Canada’s official inflation rate down to its lowest point since March 2021.

Gasoline prices were 21 per cent lower during the month than they were the same month a year earlier.

Another factor pushing down the increase in the cost of living was telecommunications services, which fell by 14.7 per cent compared with what they were a year ago.

“This was a result of both lower prices for cellular data plans and promotional pricing,” Statistics Canada said.

Prices for internet access fall
Rogers finalized its purchase of rival Shaw in April, and at least in the short term, the result has been a flurry of promotional offers between the telecom giants.

The data agency noted that prices for internet access fell by 3.2 per cent in the past year and by five per cent in the month of June alone — the biggest one-month plunge since 2019.

“This was mostly due to promotions in Ontario and lower prices in Quebec,” Statistics Canada said.

On the other side of the ledger, food and mortgage costs were the biggest single factors pushing the rate higher. The cost of food continues to increase at a pace of more than nine per cent. Coming on the heels of the annual increase up to June of last year, that means the price of food has gone up by almost 20 per cent in two years. That’s the fastest pace of increase in the price to fill up a grocery cart in more than 40 years.

Claire Fan, an economist at the Royal Bank of Canada, says despite remaining stubbornly high, there’s reason to hope that food prices will soon come down because most of the global factors that caused them to spike in the first place are dissipating.

Protrait of economists Claire Fan
Royal Bank economist Claire Fan says there are plenty of reasons to expect increases in food prices to start slowing soon. (Craig Chivers/CBC)
“It’s taking a bit longer for those domestically added pressure to food prices to come down, but they have come down and they will continue to,” Fan told CBC News in an interview.

And mortgage interest costs are also making things a lot more expensive, up by more than 30 per cent in the past year. Mortgage rates have skyrocketed as a direct result of the Bank of Canada’s campaign to tame inflation, but there’s little relief for renters, either.

Statistics Canada says rent has increased by 5.8 per cent in the past year, which is the second-biggest single contributor to the higher inflation rate in the past year, behind mortgage costs.

Calgarian Stephanie Haynes has had to deal with an increase more than five times that amount, with her landlord telling her recently that the rent on her two-bedroom apartment would increase by more than $400 a month from the $1,550 she was paying previously.

Profile of Calgarian renter Stephanie Haynes
Calgarian Stephanie Haynes says her rent has gone up by more than 30 per cent this year. (Anis Heydari/CBC)
“I actually didn’t believe it when I first got it,” she told CBC News. “I had to read it three times to make sure … what I was reading — I actually was in shock.”

Haynes said she spent months trying to find alternatives but was shocked to discover prices were the same everywhere she looked. So she’s been left with no alternative but to pay it — and then try to cut her expenses where she can.

“I have enough money to survive, but not enough money to thrive,” she said. “I have to look at all of my bills that are coming out and budget accordingly.”

The fresh inflation data comes just days after the Bank of Canada decided to hike its benchmark interest rate, for the 10th time in little more than a year, as part of its campaign to wrestle inflation into submission.

WATCH | Why the Bank of Canada is raising lending rates so fast:

What’s behind all the aggressive interest rate hikes?
6 days ago
Duration4:54
The Bank of Canada raised interest rates again, but several indicators — like inflation – show it may not have been needed. CBC’s senior business reporter Peter Armstrong explains why it happened and what comes next.
The bank justified its decision by saying more tightening was needed to get inflation back to its two per cent target. The inflation rate peaked last June at 8.1 per cent and was 3.4 per cent last month.

While it’s an encouraging sign to see the official inflation number dip back into the range of between one and three per cent that the Bank of Canada targets, there’s ample reason to think it may be a lot harder to get inflation to go lower from here.

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If gasoline is stripped out of the data, the headline inflation rate would have been four per cent. If food is stripped out, the inflation rate would have been 1.7 per cent. If mortgage costs aren’t counted, the rate would have been two per cent.

Those are great examples of why the central bank pays less attention to the headline number — because it is easily skewed by individual items that can be volatile — and pays more attention to so-called core inflation, which smooths out the noise. Of the three core inflation measures the bank tabulates, all declined, but one is still above five per cent, while the other two are barely below four per cent.

Royce Mendes, an economist with Desjardins, says it’s too early to think that the official rate will simply slide back down to target by itself, since the drop in June was based on one-time items that probably can’t be repeated.

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“The latest moves have been predicated on sharp declines in cellphone services prices, which doesn’t provide any assurance that this deceleration can be maintained,” he said. Mendes said he thinks inflation could heat up again in the coming months once the “one-off” price drops for things like gasoline and cellular services are gone.

Andrew Grantham, senior economist with CIBC, says he wouldn’t be surprised to see the official inflation rate inch higher in the coming months, once the year-ago comparisons become less favourable.

“Headline inflation will likely creep back further above three per cent in the coming months, as base effects from lower gasoline prices become less generous,” he said.

ABOUT THE AUTHOR

Pete Evans
Senior Business Writer

Pete Evans is the senior business writer for CBCNews.ca. Prior to coming to the CBC, his work has appeared in the Globe & Mail, the Financial Post, the Toronto Star, and Canadian Business Magazine. Twitter: @p_evans Email: pete.evans@cbc.ca

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