Canadian inflation is picking up, surprising the market despite warnings the slowdown was temporary. Statistics Canada (Stat Can) data shows the Consumer Price Index (CPI) accelerated sharply in October. Experts largely reiterated their expectations of a double-rate cut by next month. However, the data used by the central bank to justify the last double-cut has shifted to tell the exact opposite story needed.
Canadian Inflation Made A Sharp Climb, Reversing Sharp Drop
Annual growth rate of the consumer price index (CPI).
Source: Stat Can.
Canadian headline inflation made an aggressive push higher. The annual growth of CPI climbed 0.4 points to 2.0% in October, which is right back to where it was in August. The increase was driven by smaller declines in energy prices, which were behind September’s downtick. Also adding upward pressure was an acceleration in grocery (+3.0%), and the return of transportation (+0.2%) price growth.
Core inflation, which minimizes the volatility observed in headline CPI climbed even higher. The Bank of Canada (BoC) preferred measure added 0.2 points to 2.5% in October. Both measures are heading in the wrong direction, with the traditionally more “stable” measure approaching the upper bound.
Canadian Shelter Costs Decelerate, Helping To Slow Inflation
Shelter is the largest component of CPI, and it showed some easing but remained elevated. CPI-Shelter fell 0.2 points to show annual growth of 4.8% in October. Easing pressure on the Shelter segment was reduced mortgage interest costs, which shed another 2 points to 14.7%. That may seem really high, but it’s a big drop from the 30.9% increase reported in August 2023.
Mortgage interest inclusion in CPI is a circular issue. Interest costs depend on inflation readings, but inflation readings include interest costs. It’s as poorly planned as it sounds, since inflation rises with rate hikes and falls with rate cuts. A lot of issues there, introducing a downward bias to inflation readings being a major one. Most advanced economies avoid this fiasco by excluding interest costs, including the US.
Stat Can made special note of the unusually high level of property taxes and special charges. The subcomponent’s annual growth hit 6.0% in October, the highest since 1992. It’s an interesting year to match, considering it was right after the last housing boom, when carrying costs began to reflect price growth. A lag is typical between rising property values, the cost of living, and the increased cost of carrying services.
Stat Can further noted that all provinces saw atypical growth regarding property taxes and special charges. The segment is based on the assessed home values, municipal and provincial tax rates, municipal levies for services such as wastewater and garbage collection, and homeowner tax rebates.
Bank of Canada Still Expected To Cut In Dec, Despite Data Shifting
This morning’s data didn’t have much of an impact on the outlook for BoC rate decisions. Banks like RBC reiterated expectations of another supersized 50 basis point (bp) cut to the overnight rate in December. It follows the one made just a few weeks prior that the BoC justified with falling CPI and a growing output gap, the latter meaning the economy is underperforming its capacity.
However, the last rate decision was already odd, given the BoC’s notes. In the July 2024 Monetary Policy Report (MPR), the central bank noted CPI will see a transitory decline due to a base-year effect on gas prices. They anticipated a short-lived decline, which appears to be precisely what’s happening.
A major GDP revision from Stat Can makes the decision more questionable. The agency’s revision shows the economy was doing much better than anticipated, eliminating the output gap and placing the economy closer to excessive demand. There’s still a few more data points before the central bank makes its decision and a lot can change by then, but for now—no experts have revised their outlook for December.
Higher property taxes sounds in line with the biggest job growth coming from municipal governments expanding “administration.”
If you were around in 1992, you know that didn’t end well for the people that were hired too.
I’m getting suspicious they want property prices to rise because then people have a hard time justifying why taxes can’t rise. Raise the value of an illiquid asset and then bill people for their pet projects they seem to increasingly be connected to.
CAD is weaker and the US economy is still robust. Unless something profoundly messed up is happening and there’s a crisis we have yet to find out about, Stat Can’s data is clearly a junk measurement.
That doesn’t matter to markets because we trade what official data says. It matters to the public since they’re about to get more inflation than previously believed that isn’t measured, risking labor erosion faster than reality.
A large part of the property tax increase is also due to inflation in the cost of materials and labour, which in turn have been increasing because of high inflation. Again circular. Governments should try to rein in spending now but that means cutting services due to increasing costs. So the taxes rise, increasing inflation and interest rates, leading to increasing costs for government services! Clearly a good time to cut back on new government projects, but at the same time more investment in housing is needed, and there are also loud calls for more policing and addiction treatment, so that is not going to be easy
Well he did say he does prefer a basic dictatorship. Look at how well China’s economy is doing…
I suspect this is stagflation instead.
Rates need to be lowered to 0% as soon as possible to save the economy. They are way too high and the Bank of Canada needs to WAKE UP and lower the rates to support the people of canada and their biggest investments which are their homes.
Daniel is right on when he writes that including mortgage interest rates in the Bank of Canada’s target inflation measure, the CPI All-items, is as poorly planned as it sounds. However he understates the extent to which the Bank of Canada is out of step with other central banks when he writes that “most advanced economies avoid this fiasco by excluding interest costs, including the United States.” In fact, unless I am missing some institution, there is no other central bank in the world with inflation targeting whose target inflation measure is sensitive to nominal interest rate changes. And only the Central Bank of Iceland has a target inflation measure that is sensitive to real interest changes, which everywhere are less volatile in their movements than nominal interest rate changes. How long the CBI will continue to do so is an open question. The 2018 Task Force on Monetary Policy Reform recommended that the CBI target the CPI excluding owner-occupied housing as its inflation indicator, which would essentially be the same as the CPI excluding housing, since the tenant share of the Icelandic population is so low. Interest rates have more influence on OOH in Iceland than in Canada since the Icelandic CPI uses an opportunity cost version of the user cost approach, where the opportunity cost of owner’s equity in the home is a component of OOH costs. Although this recommendation has not yet been carried out, the CBI already pays considerable attention to the CPI excluding housing in its interest rate announcements. By contrast, there is no CPI excluding OOH published to which the Bank of Canada can refer.
The CBI is the central bank for the smallest economy in the world with an inflation targeting regime. Not a member of the European Union, it is a member of the European Economic Community. The other members of the EEC who are not EU members are Norway and Liechtenstein, these three countries being the remnants of the once much larger European Free Trade Association. Norway has a much larger economy and may be able to make an independent inflation-targeting central bank work. Liechtenstein has a much smaller economy, and has adopted the Swiss franc as its currency, therefore forfeiting any form of central bank independence. It seems unlikely that Iceland will simply adopt the euro as its currency, although it could, and a couple of EU candidate countries, Kosovo and Montenegro, have already done so. It seems more likely though that the CBI may be replaced by a currency board, similar to the one adopted by EU candidate country Bosnia and Herzegovina. The duties of the currency board would be limited to keeping the króna at a fixed rate to the euro; Icelandic monetary policy would essentially be delegated to the European Central Bank.
Technically, the Swedish Riksbank does not exclude interest costs from its target inflation measure, the CPIF. However, the “F” stands for a fixed interest rate, so while the interest rate used in the Swedish CPI to monitor OOH costs is allowed to vary, it remains constant in the Swedish CPI. The October CPIF inflation rate was 1.5% as opposed to the October CPI inflation rate of 1.6%. By comparison, the CPI excluding mortgage interest for Canada was 1.4%, as opposed to the overall CPI rate of 2.0%. The two measures are giving quite different signals and the CPI excluding mortgage interest measure is really the one worth paying attention to.