Canadians are used to seeing their purchasing power vaporize, but not this fast. Statistics Canada (Stat Can) data shows annual growth for the consumer price index (CPI) hit 5.7% in February. The measure of inflation is at the highest level of growth since August 1991. Meanwhile shelter, one of the largest weights in the CPI index, is growing at the fastest rate since 1983.
Canadian Consumer Price Index Growth
The 12-month percent change for the Canadian consumer price index (CPI), used to measure inflation.
Source: Statistics Canada; Better Dwelling.
Canadian Inflation Pressures Are Broadening
CPI shows inflation pressures are broadening, eradicating the possibility of transitory inflation. Transportation (+8.7%), food (+6.7%), and shelter (+6.6%) showed the largest annual growth. Nearly all components are showing larger than target increases. The one exception is clothing, which has always had long-term deflationary pressures. Clothing prices are still rising, just below the 2% target the central bank tries to maintain.
Canada has been warned many times about letting inflation broaden. Once it spreads across categories, there’s little chance of the growth being temporary. It also becomes much harder to control later, requiring larger shocks to try and control it. More on that later, but first — let’s talk about housing.
Canadian Housing Costs Are Rising At The Fastest Rate Since 1983
Party like it’s 1983. Where do we start? The Shelter component of CPI shows annual growth of 6.6% in February. It was the fastest pace of growth since 1983, which combined inflation and a real estate bubble as well.
Canadian Shelter Inflation Growth
The 12-month percent change for the Shelter component of the Canadian consumer price index (CPI).
Source: Statistics Canada; Better Dwelling.
Rising inflation isn’t just hitting homebuyers. Owned (+6.2%) and rented (+4.2%) accommodations both showed sharp increases. For those that need a reminder, the target rate of inflation for the Bank of Canada is 2%, with an upper limit of 3%. The current rate of shelter inflation is more than double the upper limit.
If you’re a homebuyer or have been looking to rent a new place, these numbers might appear to be unusually low. After all, home prices grew more than 50% since the interest rate cuts began. No, it’s not due to regionalization. Prices aren’t just growing faster in your part of the country. Virtually all of the country is seeing the cost of shelter soar.
CPI measures shelter for both those in housing, and those looking for housing. Homeowners have seen their costs fall since they last renewed a mortgage. This was due to falling interest rates. At the same time, those low rates inflate the value of housing for buyers, pushing their costs higher. In the end, Stat Can averages the two out and determines the Shelter rate.
Rental accommodations have a similar situation. Existing renters may have only seen an inflation-level increase. Those looking for a new place are subject to more market-level price increases. Since not as many people move as stay put per year, the growth is weighed down by existing rents. Who this data is helpful for is unclear, but that’s how it works.
The Bank of Canada is in a bit of a pickle here, since it’s their sole job to control inflation. They were previously warned they should be paying more attention to rising inflation. One bank even specified to watch out for broadening inflation. Another bank publicly warned they should pay attention, because once it hits wages it can’t be rolled back. YET ANOTHER bank warned an inflation spiral is forming, which will require much higher rates if it takes. Finally, yet another bank this week explained the spiral is here and rates will need to rise nearly double the previous level to control inflation.
No one saw it coming.
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This is what modern monetary theory gets you. Why do we have fools that don’t have any clue on how money printing works running our government and central banks. This is going to get very painful for many Canadians- there is no easy way out now.
a KEY tenant (maybe THE key tenant) of MMT is print and spend whatever you want SO LONG AS IT DOESN’T CAUSE RUN AWAY INFLATION. Cause then your mark/bolivar/ruble/dollar will be worth less (read:worthless) for trade.
Unfortunately all everyone hears when discussing MMT is the first bit.
And the key assumption behind that is that governments will have the wisdom and the discipline to reduce spending and raise taxes when inflation heats up. They never, ever do, which makes MMT a sad joke. If independent institutions like central banks can’t discipline themselves, how on earth could we ever expect elected politicians to do so? Raising taxes while inflation is taking off is political suicide to begin with. Cutting spending while inflation is heating up is similarly fatal for an elected government MMT thus relies on some crazy alternative universe that does not exist.
The final line in a eulogy to the credibility of the BoC, “No one saw it coming.”
“At the same time, those low rates inflate the value of housing for buyers, pushing their costs higher. ”
This is at the core of the BoC’s fallacies about their ZIRP and QE. There’s no reason an asset should be priced higher just because money is cheaper. It should just become easier to buy. When someone gets a loan, they don’t pay more for bananas. But, somehow, when the BoC (indirectly) gives a bunch of fools a million bucks, then all of a sudden houses are a million bucks. It’s a madness in the borrower of course, but the BoC refuses to believe that their policies have directly caused this madness. The BoC is a drug dealer, basically, getting many of us hooked on practically free money.
” No one saw it coming” ?! What a farce! You can’t just freely print and distribute money with zero consequence.
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