Canadians are returning from their tax holiday to find inflation trashed the place while they were gone. Statistics Canada (Stat Can) data shows the Consumer Price Index (CPI) surged in February. An uptick was already expected due to temporary suppression from the tax holidays, but broad inflation has now appeared. The rate was already set to smash through the central bank’s upper tolerance level—before the BoC provided more inflation stimulus with its most recent rate cut.
Canadian Inflation Surges As Broad-Based Price Growth Accelerates
Canadian inflation got a big boost as growth accelerated and reduction measures eased. CPI saw massive 1.1% growth in February, meaning more than half of the Bank of Canada (BoC) annual target was accomplished over a 28-day span. Yeah, last month was the shortest month, and preceded the central bank’s inflation-stimulating rate cut last week.
Annual growth advanced 0.7 points to 2.6% in February, with Stat Can noting the move was broad-based. This indicates that the pressures were broadly observed across categories. In fact, more than half of CPI components are above the 3-point upper bound of tolerance for the BoC.
BoC-Preferred Measures Look Even Worse Than Canada
Core CPI, the BoC-preferred measures, look even worse. These measures minimize the influence of volatile components to provide a clearer picture of the trend. Both CPI-Trim and CPI-Median rose to 2.9% annual growth in February. Annualized 3-month growth is now above the tolerance threshold for both the CPI-Median (+3.4%), and CPI-Trim (+3.3%). The 6-month trend also sits above the upper bound, indicating inflation is way too hot. It’s also about to get even hotter.
Bank of Canada Trashed The Place While You Were On A Tax Holiday
As previously mentioned, the GST/HST holiday partially offset the rising CPI. Since CPI prices include sales taxes, a minority of components were artificially suppressed—arguably having a disproportionate impact. As these taxes are reintroduced, the artificial suppression will be removed. When excluding the effect of indirect taxes, headline CPI’s annual growth hits 2.9% in February, within spitting distance of breaching the tolerance.
The tax holiday ran until mid-February, meaning half of the month was still suppressed. March data won’t have any of those downward pressures, revealing a much higher rate even before the impact of general inflation—which is, once again, broad-based. Then there’s the rate cut just delivered by the BoC, which they opted to do despite knowing the acceleration was coming.
It’s easy for the average household to appreciate that rate cuts were delivered to offset the trade war. However, the central bank knew that was to gain political favor since that’s not how monetary policy actually works. While they were applauded for slashing interest costs, the decision drove inflation expectations and financing costs even higher.
What can deliver a bigger blow to Canadians than a trade war? Rising inflation, higher home prices, and more unemployment—also known as stagflation. That’s where poorly made monetary policy decisions can take us—even if the trade war is resolved promptly with minimal casualties.
Watch the Bank of Canada balance sheet. They knew this was a disaster and not one commercial bank expected the last two rate moves. This smells like Tiff is trying to raise liquidity for bond holders that need some more liquidity room ahead of any downturn.
Forgive me if this is dumb, but won’t they just use QE to absorb any excess liquidity to suppress rising yields?
Not a dumb question because everyone assumes this is the case. QE is an inflation creation tool for when demand completely collapses.
Since inflation is at the upper bound they can’t just lower inflation—it would have to be followed by a surge in rising interest rates which are equally nauseating. Tiff’s too panicked for this line of work, he should go back to being the bank advisor.
Muggers rib u with a gun.
Politicians with a pen.
When interest rates were at the zero lower bound without stimulating inflation, QE could be used because expanding the money supply would not be inflationary (and for more than a decade, it wasn’t). That’s not the world we live in now. Inflation is alive and well, and QE is going to pump it more.
Bank of Canada’s main priority is to pump housing prices higher.
Canada must protect house prices at all costs.
Canada is a housing superpower
Bad article that entirely neglects to mention the delay in tariffs winding up. Were trying to build a more resistant Canadian economy that can stand strong without the USA allowing free trade. We wont do that by increasing rates and running already stretched Canadians into homelessness.
A recession is coming. Rate cuts can help prevent its severity.
This article reads like anti Canadian 51st state propaganda and makes the ownership of this news outlet clearly not Canadian.
Nah, you just have a primitive take of economics. Tariffs are inflationary, and the assumption a recession reduces prices is incorrect in this context. This isn’t like a recession where demand falls off and results in surplus, it’s like when a country goes full Venezuela.
All commodities are priced in US dollars. The worse the trade war gets, the more expensive the inflation basket gets. Tiff and Co are clowns that are assuming all recessions are the same, when that’s not the case.
Besides, the issue seems bigger because they want to shift the erosion in data on the US. Post election it’s just going to be resolved.
The fundamental problem has been since 2017 the feds, commercial banks have pursued policies that are 100% counter to the boc monetary policies.
For example, when cpi was out of control in 2021, banls and tge feds kept increasing the m3 to non productive inveztments. By 2022 the cry was for tight monetary policy,, which should sliw m3 growth. However we ha freeland tak8ng credit risk from banks, spending billions on building housing, and expanding the chmc, bdc, edc to take on ever more risky debt for what is essentially an asset bibble. So in effect they wete adding gasol8ne to a tire fire.
So eitger you have a free market, or you have a regulated matket. You cant have most new mortgages be insured by the feds, and expect banks to stop creating mortgage money, driving prices exponentially higher. Thete is no supply problem, there is a serious price problem.
As such, the boc moves to constrict lending were completely sabotaged by freelands terrible policies and failure to regulate. Even worse, carney is alreafy doing the same nonsense with banks and the chmc, using tsxdollars to attract foreing investors to buy property in canada?
So we have the boc stuck with policymakets using tax dollats to msintain ultra high housing price, and even higher bank profits? All while the middle class fiez in canada.
If the gpvt had left things alone, priced shpuld havr corrected strongly and fixed this mess.
They should have let the housing market collapse back in 2008.
This Bank of Canada has no idea how to deal with the current situation which is a stagflationary environment. That we are in a period that risks stagflation has been clear for some time. The bank seems to be aggressively addressing the stagnation, but not the inflation.
Having said that, stagflation is very difficult to deal with. And while I do not pay close attention to all of the banks comments, what is reported most frequently focuses exclusively on the stagnation part. I think that sends the wrong message.
I also feel they are focused on the belief that lowering interest rates will somehow contribute to lowering the cost of how housing. It isn’t doing that. Intrinsically, it can’t do that because we have an excess of demand over supply. Lower interest rates, when interest rates are already very low (an ongoing payment for the 2008 financial crisis, which seems to have permanently lowered the effectiveness of interest rate policy on everything except the profitability of large players in the economy), easy ineffective.
I knew when they made that 0.5% drop that it should have been stopped at that point for at least 6 months. Or they should have gone the more gradual root with .25% cuts and not cut at this last meeting. The rate right now should be anywhere from 3-3.5. I’m a variable rate mortgage holder that re-upped last June and I want them to get this right.
*More gradual route. Not a plant root 🤣