From low-for-long to high-for-longer, Canada may not have inflation under control. A new report from BMO Capital Markets forecasts the Consumer Price Index (CPI) for Canada, and the US will taper into next year. Despite US inflation being much higher, it’s expected to fall below Canada’s rate and start 2024 at a more stable level.
Canadian Inflation Is Growing At A 31-Year High
Canadian inflation was the highest in over 31 years, last month. Annual CPI came in at 6.7% for March but is currently forecast to taper. Even with a slower half to the year, BMO sees 2022 averaging 6.5% — more than 3x the central bank’s target rate.
By next year, they expect a more modest inflation jump, but it’s still high. The forecast for 2023 is an average of 3.5%, with the fourth quarter falling to 2.8% annual growth. It would be the first time since 2020 that Canada fell within the target range but remains higher than the actual target rate.
US Inflation Is At A 40-Year High, But Expected To Cool Rapidly
US inflation is higher but expected to cool much faster. US CPI showed annual growth of 8.5% in March, a 40-year high for the index. The average for 2022 is expected to fall to 7.7% — lower but still really high.
Next year is when US inflation is forecast to come under control rapidly. Growth for 2023 is forecast at an average of 3.5%, with the fourth quarter falling to just 2.5% annual CPI growth. That’s a sharp slowdown, especially considering how high the current rate is.
Both Canada and the US are forecast to see CPI slow to less than 3% next year. However, in the fourth quarter, US growth is forecast at 2.5% vs. Canada’s 2.8%. This implies 2024 will be off to a better start in the US, finally reaching a more stable rate of inflation. Having a higher neutral rate in the US, also gives them more room to fight inflation aggressively.
The BoC warning they may need to go above the neutral rate of interest to control inflation is something to keep in mind. The US has a higher neutral interest rate and may need to keep hiking after Canada hits its neutral. If Canada wants to keep up with the US, it would have to risk contracting the economy to bring inflation lower.