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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