Canadian real estate is finally starting to show up in inflation data, but it may not be as high as you would guess. BMO chief economist Douglas Porter shared his take on Canada’s inflation numbers. The consumer price index (CPI) is starting to make a sharp climb. Most of the increase is attributed to the comparison period, but not all. The second-biggest driver of CPI last month was shelter, and it wasn’t subject to much of a base effect.
Canadian CPI Rises 2.2%, Almost Double The Previous Month’s Rate
Canadian inflation numbers made a sharp increase, with the annual rate doubling. CPI increased 0.5% in March, when compared to the previous month. This brought annual growth to 2.2%, double the month before. The jump may not feel all that big, due to the influence of the “base effect.”
Base effect is when a previous period had low growth, exaggerating current growth. March 2020 was the beginning of the pandemic, when the initial shock was felt. Lockdowns pushed price growth for goods and services flat. The current amount of growth now looks on target, but central banks are ignoring that. Instead, BoC said it will look for “sustainable” inflation, next year.
Canadian Consumer Price Index (CPI)
Source: BMO Economics, Haver Analytics.
Shelter Costs Are The Second Biggest Driver of Inflation Now
Porter previously said Canada’s hot real estate market would show up delayed in the CPI. Now it’s finally arrived, although he says the impact is still muted. The shelter component of CPI increased by 2.4% in March, compared to a year before. Not quite a reflection of what many people would associate with housing.
There are a few trends skewing the view on shelter, and one of those is replacement costs. “The replacement cost index (basically, new home prices) was one of the biggest contributors to the rise in inflation, both last month and over the past year (jumping 7.9% y/y),” he observed.
The huge growth is muted by the heavy weighting of mortgage servicing costs though. Shelter costs also include the cost of maintaining homes already owned. Since mortgage rates plummeted, payments can fall for renewal. Mortgage payments are a substantial weight for the index, and the primary reason it’s so low. That may be temporary, as “mortgage interest costs keep this measure in check—for now.”
Shelter costs were only second to gasoline prices, which surged a whopping 35.3% from the same month last year. This was a huge skew due to the base effect. When the pandemic first kicked off, lockdowns led to excess inventories. This pushed gasoline prices much lower than they normally should have been. Now that demand has returned, and inventories are better planned, prices are firming.
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