Canada

If You’re Not Worried About Inflation Burning You, “You’re Not Paying Attention”: BMO

Another Big Six Canadian bank is warning inflation will be worse than people think. Not one, but two inflation research notes were published by BMO this week. Yeah, it’s only Tuesday. Chief economist Douglas Porter says there are many signs inflation will run hot. The bank warned, “if you’re not just a bit worried about real inflation, then you’re not paying attention.”

Canadian Commodity Index Rises 24%

Commodity prices are ripping higher, at one of the fastest rates in history. The Bank of Canada (BoC) commodity index jumped 24% in the first four months to the year. The index is now at the highest level since 2014.  

Porter says prices more than doubled from a year ago, the biggest increase in 50 years. That can be interpreted as a data slew, due to the comparison period. Last year at this time, lockdowns were first introduced, causing a huge shock. It’s difficult to argue the more recent acceleration should be dismissed though. The National Bank of Canada also made a similar point earlier this month.

Ex-energy, the index is at an all-time high. “This week brought fresh multi-year, or record, highs for commodities as diverse as lumber, copper and wheat,” he said. 

Hourly Wages Are Rising Faster Than Usual

Canadian hourly earnings have been rising faster than normal, despite the “recession.”  He points to the fixed-weight earning index. The weighted index “corrects for some of the massive shifts between sectors,” he said.

Hourly wages are 3.8% higher in February, when compared to a year before. By his calculations, the average increase was only 2.4% over the past decade. Higher wages are typical of a low unemployment environment — not one with an elevated rate.

Asset Price Inflation Is Everywhere

Most of you don’t need to be told there is asset price inflation, which “continues to run amok.” The bank points to the average Canadian real estate price rising 31% in March. He says he won’t bother getting into it though, since “that’s so well known.” 

Instead, he says look at the global picture, starting with U.S. real estate prices. The average home price saw an annual increase of 12% in March. This is the strongest rate of growth in the past decade, he reminds people.  

As for equity prices, they “hit yet new highs this week.” The MSCI World Index captures large and mid-sized equities in 23 countries. It has increased 20% from pre-pandemic highs in February 2020.

“Meantime, everything from art, to bitcoin, to baseball cards are ripping higher,” he said. 

Long-Term Inflation Expectations Are Running Hot

Commodity inflation is the big story these days, as they push the cost of living higher. Many, including the Bank of Canada (BoC), see the rise in this area as temporary. The common belief is the burst in prices will fade as supplies ramp up. It was common with energy prices, and it’ll be common with that of other segments, right? 

Porter points to longer-term inflation expectations that are ramping up with commodities. “The five-year forward expected rate of inflation seems to move almost in line with commodity price trends,” he said.

The five-year forward rates are now at the highest level in seven years. While it’s “only” at 2.25%, “the Fed has already achieved one of its goals—shifting expectations above 2%,” he added. 

Inflation May Moderate Later This Year, But Risk Is To The Upside

In the bank’s opinion, they see inflation moderating later this year and into 2022, but still see upside risk. The bank says this is “the single most remarkable aspect of this cycle.” A year ago, the world was worried about deflation from the biggest post-War downturn seen. Now there’s the possibility of inflationary risks.

Some view avoiding deflationary risks as a success, but a different issue is created. “Monetary and fiscal policy appears more than happy to ‘run the economy hot’ for a spell. But, as rising inflation risks suggest, when you run things hot, you risk getting burned” he warns.  

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18 Comments

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  • Han 4 months ago

    It’s important for people to understand inflation risk is relative. 3% doesn’t sound like a lot compared to the early 80s, but it sets the expectation for lending rates.

    A 50% increase above target resulting in a 24% rate or 3% rate has the same impact on lending, and liquidity.

  • Herry 4 months ago

    This corrupt POS wants to jack up prices. Leave it to a POS to perpetuate the problem.

  • Holton 4 months ago

    Guys, I know many people here didn’t have proper economic training in university. So I will explain this in very simple terms. Inflation does not automatically cause interest rates to rise. That is a human decision based on certain outcomes a group of people are trying achieve. Read that again if you didn’t completely understand the gravity of that statement.

    Do you understand where the world is at now? We are just on the edge of a very fragile economic recovery. Are we going to raise interest rates to kill our exchange rate hence our export sector at this time to make housing affordable? If the goal was to make housing affordable we would have either let prices fall last year or use controlled inflation to make housing cheaper relative to all other good in the economy including labor over an extended period of time.

    I’m just telling you the truth, Canada being a small/medium economy in the world we can only follow trends set out by the world. Also for those of you who thinks eventual increase of interest rate to 3-4% will pop the housing bubble you are lacking understanding in dynamics of inflation and real estate prices.

    I said time and time again, if we didn’t bring prices down last year we are not going to do it now. We will however put in measures to cool the market and use controlled inflation to achieve our goals.

    For a sudden real estate market with high inflation backdrop we will need at least 10-15% interest rate. Is that even realistic in modern times? We need to face reality and accept real estate prices will remain high along with inflation. This is what happened in Asia. For those who are still not convinced, look at Turkish inflation numbers and their interest rates. How much did their interest increase with those insane inflation numbers?

    • Dave 4 months ago

      I’m a bond trader. This is incorrect on so many levels. It’s insane how arrogant you are about other people not understanding inflation and ultimately bond prices, without understanding even a tenth of the issue.

      No one is lending money for less than inflation. The inflation is due to excess monetary capacity. They can’t bond prices without increasing inflation. It’s like a snake trying to eat its tail.

      Your take, which appears to be the same one every day, reveals you know less and less by the word.

      • Holton 4 months ago

        Well I guess you never studied how they manipulate bond yields huh? How is that “bond trading” going for ya dave. All these decisions are to achieve a goal Dave. What do you think the macroeconomic goal of the country is? Please educate us on that Dave. Is our goal to crash housing prices and increase interest rates at this time? Please let me know if you have any more questions. I happened to be in the financial industry too. You are simply making a statement without any logical argument. Who’s money are you trading with btw? I need to know to protect my money.

        • Dave 4 months ago

          Yeah, I guess I did miss that lesson. Did the Facebook group that teaches that explain it before or after the lesson tin foil hat crafting?

          • Holton 4 months ago

            Hey Dave, you didn’t answer any of my questions. Btw, can bond traders trade anything other than bonds? You are being dictated the terms of your yield. You don’t control what yield you get, you are given that yield. Do you understand that Dave, when inflation is high you have no choice but to accept those terms. What can you buy with that money Dave? Looks like I know your role better than you.

      • david 4 months ago

        Hey Dave, thanks for your comment.
        As a bond trader, what do you think of the Canadian fed having 40% of the government debt on their balance sheet? Are they really in competition with private lenders and is there a risk of having the latter just exit the market.
        Thanks

      • James 4 months ago

        Please explain. You mean if inflation rises bond yields will follow and pushup mortgage rates?

        • Dave 4 months ago

          Bond yields need to reflect inflation, otherwise, the state or an institution that thinks the world is ending is the only buyer.

          If inflation rises, bondholders expect to be compensated for at least the rate of inflation. Bonds are used to fund things like mortgages.

          Short-term lending rates are primarily influenced by the policy rate, while long term mortgage rates compete for returns from bond yields of a similar nature.

          I think I BD did a good high level explanation not too long ago.

          • James 4 months ago

            Thanks Dave. So is the inflation rumbling in the media more noise than reality?

          • Holton 4 months ago

            Hey Dave, can you explain to everyone if you can trade anything other than bonds and the reason behind it? Can you also tell everyone that when inflation goes up you as a bind trader have no choice but to by at the yield given to you? Thanks Dave, looks like you dont decide what the interest is based on inflation.

    • Tholen 4 months ago

      You’re very rude on here. You should calm your horses. People have different views. If you were the fountain of truth you’d be running the BOC, but you’re not, you’re just another loser schmuck on BD like the rest of us. Grow up.

      You think prices won’t go down? Me and many of the people I know are making plans to leave the country. By my count that will remove at least ~$3M/y from the economy based on who I know is making plans to leave so far. Might be a drop in the bucket, but you can be sure we aren’t the only ones. Who will be buying? It won’t be us. There may be others, but good luck having a functioning society with no skilled workers.

  • Om 4 months ago

    Sorry for lack of understanding about economics. If home price continue raise 20%-30% per year, while local resident salary is only increase 2% per year, who will be the owner of houses in Canada in the next 3-5 years? Are the local resident is pushed out from Canada and look for another country that provide more reasonable salary ?

  • D 4 months ago

    Civilization, that is western civilization is near collapse. The only wild card we have is nuclear weapons by far the greatest weapon and defensive measure ever created thus far. The economic and power trajectory is going east, east Asia will be the new west. It’s sad to say this but the powers that be have already decided your future and it is bleak. Every white western billionaire kingpin is already hedged and have direct ties to communist China especially the Rothschild clan. It’s over guys.

  • E 4 months ago

    No one is lending money for less than inflation…. Then what about negative yields in the bond market? Honest question, I’m just curious how that works considering countries like Denmark issued negative yield bonds and still over subscribed.

    • US10yr 4 months ago

      The expectation was for deflation which is negative inflation, leading to negative rates. The money has to be parked somewhere and the danish government looked good.

  • 10year 4 months ago

    Interesting article backing up something else I viewed.
    I watched a presentation this week in which some of the biggest money managers Blackrock, Vanguard, the banks, pension funds etc were asked what level would the US 10 year yield would have to get to for them to get concerned. The answer averaged out to 2.5%. So thats the Feds marching orders.
    The takeaway is a short rate hike cycle is going to happen if inflation sticks.
    I just wonder what the average Joe does after we fully reopen? Likely they will spend, likely on recreation/travel which really is oil consumption ?
    hmmm

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