Canadian inflation is under control, as expected with the country’s unique modeling strategy. The Statistics Canada (Stat Can) Consumer Price Index (CPI) shows annual growth slowed in July. The quick slowdown was due in part to a circular reporting model, where central bank rate decisions have significant influence on the report itself. Slowing headline inflation is now expected to lead to 3 more rate cuts in 2024. With the unique reporting system, not used in other advanced economies like the United States, these cuts are likely to lead to slower inflation and potentially sharper cuts next year.
Canadian Inflation Climbed 2.5% In July, Slowest Annual Growth In 3 Years
Annual growth rate for the Canadian consumer price index (CPI).
Source: Statistics Canada.
Canadian inflation has been grinding lower as consumption slows across the board. Headline CPI fell 0.3 points to 2.5% in July, representing a 0.6 point decline from last year. This is the lowest rate since March 2021, and just 0.5 points above the Bank of Canada (BoC) target rate of 2.0 points.
Canadian Inflation Deceleration Led By Slowing Shelter Prices
Headline inflation is slowing due to shelter, the largest component in the basket. Annual growth came in at 5.7% in July, decelerating from the 6.2% reported a month prior. The agency attributed the slowdown to the major subcomponents—electricity, mortgage interest, and rents, which have all slowed. It’s probably worth remembering this component is still nearly 3x the target rate, emphasizing how much slower the other components must be.
The slowdown for car prices was also driving slower inflation last month. Car prices fell 1.4% over the 12-months ending in July. Annual price growth remained positive but slow for new vehicles (+1.0%), but fell sharply for used vehicles (-5.7%) over the same period.
Canada Uses A Circular Inflation Model Where Rate Decisions Directly Influence Inflation
Canadian inflation declined so rapidly partially due to the circular nature used in reporting. Stat Can includes mortgage borrowing costs in its basket, which are largely influenced by the BoC key interest rates. This leads to upward pressure on CPI when the central bank raises rates, and lower pressure when they cut rates. It’s a self-serving loop, resulting in the central bank’s decision being a key component in the direction inflation moves.
This isn’t the norm in other advanced economies. For example, the U.S. doesn’t include the cost of mortgage interest, arguing it would be silly to have a circular feedback loop that doesn’t accurately measure the cost of current consumption—which CPI is designed to measure. Instead, including the cost of borrowing reflects the contracted cost of consumption today, but not necessarily a real cost that will be incurred—either through refinancing or selling early.
Bank of Canada Forecast To Cut Rates 3 More Times In 2024
Understanding this model, it’s not hard to see why inflation is set to decline fast—and why a lot more rate cuts will arrive, circularly providing lower inflation.
“Inflationary pressures continue to fade, and were it not for the continued upward pressure from mortgage interest costs inflation would have been in-line with a 2% target in every month since the start of the year,” explains Andrew Grantham, an economist at CIBC.
In a brief written to investors, he explains the central bank will focus on its approach to downside risks to the economy, such as rising unemployment.
His bank now expects three more rate cuts by the end of the year. That would bring the policy rate to 3.75% by December. Much lower than the current level, but still higher than 2019 era interest rates.
Though those same cuts are also likely to shrink CPI shelter, and thus inflation—thus facilitating even lower interest rates.
Finally, variable rate mortgage is becoming attractive again.
Not quite, fixed rates still have quite the gap. We’re getting there though!
Good read. One assumes that the inclusion of mortgage rates also led to overstating inflation, and the much faster tamp down of the economy than the US is seeing? i.e. we didn’t see the boom they did, just the correction.
More important question is how does this impact the loonie? Won’t it lead to weakness against the greenback and higher inflation through imported commodities?
Yes, rates climbed higher and faster than they should have but that was also Tiff trying to break psychological adoption of borrowing.
Stronger greenback might influence inflation if it were measured properly, but indexing bias is going to be an interesting tool used to artificially lower the reported numbers.
You got it. I don’t think many in Canada including the financial geniuses see this. More rate cuts will lower the Canadian dollar raising the prices of all the imported goods.
Ok, 4 months from now ,with possibly 0.75 basis points deducted, or next year with another 1 basis points deducted, variable has always been the better way to go long term.
Unhealthy for an economy so closely link to the US. A Double whammy, a big hit on the Canadian dollar along with more infation of goods and services. Also good way to accelerate the brian drain by dropping real wages and making housing cost higher as the real estate casino starts claiming again. BoC like it or not needs to mirror the FED. Until than interest rates should hold steady. Canada should stop focusing on the few that did not spend wisely and bought beyond their means.
Good insight. The problem with democracy is it only works as hard as the people voting, and we’ve turned into a lazy country of wannabe elites who think they should be able to retired just for paying their mortgage bill on time.
Look at all the economists in the comment section….
3rd attempt at posting this unpopular opinion.
– Rate cuts will cause CAD to go down and inflation to go up even further.
– Rate cuts cause capital flight. Canadians will simply transfer Canadian currency and CAD denominated assets to their US accounts with a click of a button.
– Rate cuts will cause an even bigger housing affordability crisis.
– Rate cuts will trap new home owners with a false sense of security and then the rug will suddenly be pulled from under their feet when inflation rises and rates have to again be increased to control inflation.
– Rate cuts are a debt trap for new immigrants and investors.
Be careful what you wish for. Rate cuts are a disaster. No other way to put it.
It looks like it’s your fourth one. Did you try hitting refresh, genius?
You copy pasted the same reply over and over to different people. I’m surprised WordPress didn’t automatically flag your IP for spam tbh.
I wish there was a way to delete the duplicates. Yes I did refresh, delete cookies and also post incognito. There is possibly some kind of a delay or moderator evaluation.
Flagging IPs btw, does nothing to prevent a determined poster. Age of VPNs and all…..
Most large websites us WP Vip which uses akismet to determine spam. It runs on basically 1 in 10 sites in the world, so if that’s the case the comment filter is a lot more complicated than just your IP. Akismet determines probability of spam based on words and repost frequency (so if you repeatedly reposted the same comment on another site, it may have considered it spam.
If you really care, I’m sure you can email a site & ask them to pre-approve your comment, but judging by the fact this wasn’t repeated you might have already been passed as a non-threat.
Justin trudeau did that!
Ex-shelter inflation is 1.0%. Does anyone else believe outside of shelter, their costs have only increased 1.0% over the past year? Ludicrous narrative they’ve adopted. I, and I’m sure others, would appreciate a bigger breakdown of Canada’s modeling biases here.
Unhealthy for an economy so closely link to the USA. A Double whammy, a big hit on the Canadian dollar along with more infation of goods and services. Also good way to accelerate the brian drain by dropping real wages and making housing cost higher as the real estate casino starts climbing again. BoC like it or not needs to mirror the FED. Until than interest rates should hold steady. Canada should stop focusing on the few that did not spend wisely and bought beyond their means.
Rate cuts will be a disaster.
– Rate cuts will bring down the CAD causing even more inflation.
– More inflation down the road will cause another round of rate increases which will cause even more turmoil. We are talking just a few months down the road of the initial cuts since cycles now move with exponential speed.
– BOC has to follow the Fed by ensuring rate differentials do not get too attractive for Canadians to simply hold US dollars. BOC has to prevent capital outflows that are triggered by rate cuts and currency devaluation.
– Rate cuts will magnify housing affordability crisis.
– Rate cuts are a sure fire sign of an impending recession and job losses. Almost all recessions were preceded by the first few rate cuts.
– Given the levels of indebtedness, upsetting the fragile apple cart with rate cuts is a sure fire way to trigger a depression this time, not a recession.
Be careful what you wish for. BOC should stay the course and let the inevitable play out.
– Rate cuts will cause CAD to go down and inflation to go up even further.
– Rate cuts cause capital flight. Canadians will simply transfer Canadian currency and CAD denominated assets to their US accounts with a click of a button.
– Rate cuts will cause an even bigger housing affordability crisis.
– Rate cuts will trap new home owners and then the rug will suddenly be pulled from under their feet when inflation rises and rates have to again be increased to control inflation.
– Rate cuts are a debt trap for new immigrants and investors.
Be careful what you wish for. Rate cuts are a disaster. No other way to put it.
Note: This is not necessarily a popular comment as it was originally deleted for some reason.
– Rate cuts will devalue the Canadian dollar.
– Rate cuts will increase inflation.
– Rate cuts will cause capital flight to stronger currencies.
– Rate cuts will cause an even bigger housing affordability crisis.
– Rate cuts will trap new home owners with a false sense of security and then the rug will suddenly be pulled from under their feet when inflation rises and rates have to again be increased to control inflation.
– Rate cuts are a debt trap for new immigrants and investors.
Rate cuts are another attempt to kick the can down the road. No other way to put it.
If inflation is tapering, why is a rate cut necessary? How will it solve the housing affordability problem when houses become even more expensive?
Their argument is that housing inflation is now pushing and keeping CPI higher than required. So, by lowering interest service payments, thus driving down inflation CPI for housing enough that lower rates push up prices which in turn pushes up costs and CPI. It’s a circular feedback loop until real prices correct back down to reality.
Fatal assumption. Go back to the 70s and 80s to see what happened to inflation when rates where cut in an inflationary cycle.
Why would these geniuses who brought us into this mess, be trusted to make the right move to fix it this time?
Rate cuts are a disaster overall. Only folks waiting to sell and get out of the country will benefit while new buyers at these high prices will face a life altering rug pull of high interest rates that will follow.
As the CN an CPKC strike shows, the next leg of inflation is coming… wage inflation.
Followed by leftist wage and price controls. PET 2.0
It takes a decade to flush out the reckless money printing of 2020-2021
The inflation measurement seems bogus. Every time I shop the prices keep rising by 10% or more.
Taxes are not included in determining inflation so basically the inflation rate is sheer nonsense.
Finally!! My house price will start going up again making me $$$
Renter rebels will be angry but they missed out. Better luck in your next life rebels. Rates should be cut faster and the closer to zero the better.
How does your house price going up make you dollars unless you sell? And sell to who if no one can afford it? Also without wage inflation, rents will peak after which you will need even more tenants and mattresses in your basement to pay your mortgage and high property taxes. Crime continues to go up and tenants will destroy properties in a scorched earth way. Landlords will compete for fewer and fewer high quality tenants as younger adults leave the country. A renter is not exactly a mortgage slave that has a stake in the country. They can leave just as fast as they came in, specially immigrant renters. In a weird sort of a way, a renter is truly free. It is the mortgaged landlord who is the real debt slave.
If you really think the same as you post, you are part of the problem facing western economies.
Everything is done to bail out the investor class and continue transferring wealth up to the 1%.
John Doe with his mortgage paid off is sitting in his 2 million dollar bungalow gloating. But the way things are going, the equity in his home in 50 years will be enough for his grandchildren to buy a loaf of bread and a gallon of milk.
The real problem is that as property prices drop, spending particularly on large items will contract as homeowners feel poorer . This also causes higher unemployment and less spending. Add in higher mortgage payments and less cash available and you have the makings of a full-blown recession. Dropping a few interest rate points may or may not solve the problem.
All bets are off.
But that logic is circular, especially with young adults not owning. If more than half the population only sees the wealth effect with older adults, it amplifies the opposite for them.
This is how we entered the whole declining loop of productivity. We now have three kids supporting boomers financing a hot tub. Something’s gotta give, and the bigger the issue the worse the amplification.
For the past months almost 40% of the population, or what was the middle class, have used their savings and not able to afford to contribute to their rrsps letalone put food on the table and keep up with their bills or even fill their gas tank -not to mention 1 in 4 families using food banks that the middle class used to contribute and no longer are able -all this without adding to , but trying to maintain a lifestyle they knew before our national debt payment hit $50 billion on a debt of $ 1.4 trillion and counting. Some ppl are sheltered from the state of the economy , own their own homes outright and only noticed they had a bit less $ in their pockets. For many who followed the BOC narrative interest rates would stay low for an extended period of time then pulled the rug, they effectively created debt slaves -that’s what happens when you trust governments who have no idea how to run an economy and believe budgets balance themselves – or they just don’t care. The capital gains tax ,PBO says they only hit 40% of the expected revenues. Know what that means? In the wind and has been discussed, the home you are in right now will be subject to a home equity tax. Some would say not coming up to an election year , there most likely will be a postponed election due to “yet to be seen” circumstances that could last up to 2 years. When over 70% of the populous wants a new PM with scandal after scandal and he won’t leave should tell you something is cooking. The government is broke and coming for your equity. Not so sheltered will we all be.
“Canadian inflation is under control, as expected with the country’s unique modeling strategy”
Unique indeed.
I don’t pretend to be an economist, don’t own any second homes, don’t have any stakes in keeping the real estate bubble afloat.
Just an average citizen who understands that the cost of living has gone up 30-50% on most basic goods in his basket. In just 3 years, no-name butter went from $3.50 to $6.50, laundry soap is up to $18 from $12, and olive oil went up from $12 in 2021, to $18 in february, to $29.99 since last month. Not buying any of this bs that ‘inflation is under control’.
Thank you