Canadian inflation slowed further last month, but the details show why few people may have felt it. Statistics Canada (Stat Can) data shows progress for the headline measure of the Consumer Price Index (CPI), which decelerated in November. The agency reported a broad-based slowdown, though half of the major components were still growing significantly above the target. One of those components is Shelter, where mortgage interest growth slowed and rents resumed acceleration.
Canadian Headline CPI Slows, BoC-Preferred Core CPI Unchanged
Canadian headline inflation slipped lower in November. CPI’s annual growth fell to 1.9% in November, down from 2.0% in October. The 0.1 point decline was almost entirely due to a base effect in gasoline prices. CPI is back up to 2.0% when gasoline is excluded from the measure.
Most attention goes to headline inflation, but the Bank of Canada (BoC) uses Core CPI. Despite including the headline on their frontpage, the Core measures are preferred since they minimize short-term volatility that can skew growth. These numbers showed much less progress last month, with annual growth of both Median (+2.7%) and Trim (2.6%) measures unchanged last month. This implies the central bank’s take on the data should be a little different from the general take, but who knows. Back to headline data!
Major Inflation Components Slow, But Half Remain Above Target
Stat Can notes the deceleration was broad based amongst the 8 major components. Though only 4 out of 8 were below the target rate, and driving the return to normal. Those categories include Transportation, and Recreation, Education & Reading. It also includes Household Operation, Furnishings & Equipment, and Clothing & Footwear—both which the agency notes showed lower prices due to Black Friday discounts being steeper than last year.
Source: Statistics Canada.
The remaining 4 components were significantly above target, which included Food, Health, Alcohol, and Shelter. These 4 categories generally make up a larger share of recurring spending for households. However, the influence on CPI is less significant after the most recent methodology change.
Canadian Mortgage Interest Costs Slow, Rents Accelerate
Speaking of Shelter and methodology, the index shows lower cost mortgages are back to boosting rents. Annual growth for the component was 4.6% in November, shedding 0.2 points from the rate in October. Mortgage interest (+13.2%) remained lofty, but shed a point from the rate and helped to create most of the downward pressure for the component. Meanwhile the return of cheaper mortgages and fuel for investors helped drive a re-acceleration of Rent (+7.7%), which added 0.4 points to the rate in the month.
Mortgage interest has been a major driver of inflation and helped to bring headline CPI down. This is due to the circular inclusion of the measure—inflation determines mortgage interest, and mortgage interest is one of the largest influences on CPI. As a result, rate adjustments directly impact the CPI—rising as rates climb and falling as rates are slashed. Most countries, including the US, don’t include it as it tends to skew inflation to the downside.
It’s becoming clear that Stats Can is doing junk price analysis. The trade value of virtually every major commodity is climbing in US dollars and CAD just fell below the 70 cent mark for the first time since the C*VID low.
https://www.thestar.com/business/loonie-drops-below-70-cents-us-in-late-morning-trading-s-p-tsx-composite-also/article_349237b6-82fd-556e-b8a8-7ce265b214fe.html
Expect more of this. The PM clearly indicated that house prices cannot be allowed to drop. It is also obvious that any other policymaker will also not allow them to drop. And in economics, you cannot do only one thing. There is bound to be a side effect. One way house prices don’t drop is if the currency depreciates. And that’s what the policymakers have chosen, wittingly or unwittingly. Watch as USD keeps appreciating against the CAD… which will lead to inflation.. and consequently a rise in wages, until the houses become somewhat more affordable – without, of course – any meaningful reduction in prices. Will we see a 50 cent loonie? or worse? Who knows!
Shocker, every news agency ignores Core CPI like Bank of Canada suddenly decided they weren’t going to talk about anymore.
What’s the point of low inflation readings if it doesn’t match reality?
Spoiler: The circular logic designed with mortgage rates wasn’t an accident. It’s not that they don’t understand shelter costs, it’s that they don’t want to understand it.
Investors get 30-year mortgages on their new construction units, improving cap rates with ended financing starting this week. The speculation game has resumed, slanted much more against end-users this time around.