Removing Mortgage Interest From Canada’s CPI Makes Inflation 30% Higher

Canada is searching for inflation, but the whole index gets a massive boost by removing mortgage interest. Statistics Canada (Stat Can) consumer price index (CPI) made a slow increase in January. However, if one were to exclude falling mortgage interest rates, inflation jumps by almost a third.  

Canada’s CPI Is 1% Higher Than Last Year

Canada’s CPI isn’t rising very quickly – at least when looked at as an aggregate. The measure made a monthly increase of 0.58% when unadjusted. Compared to the same month last year, the measure pegs inflation at just 1.02% higher. This is about half of the inflation the Bank of Canada (BoC) prefers to see. There’s a few reasons for this, but one is the influence of mortgage interest. Yes, mortgage interest. 

Canadian CPI Change

The 12-month percent change in Canada’s consumer price index, including and excluding mortgage interest.
Source: SC, Better Dwelling.

Excluding Mortgage Interest Increases Inflation By 30%

Excluding mortgage interest boosts inflation substantially, according to the agency’s numbers. When excluded, the monthly increase jumps to 0.72% in January – about a quarter more in the month. Compared to the same month last year, excluding interest it’s 1.30% higher. That’s an increase of nearly 30%, when you exclude the change of mortgage interest. What gives? It has to do with how quickly mortgage rates have fallen over the past year. 

Making Inflation Baskets That Fit Everyone Is Hard

Mortgage interest is a substantial portion of the CPI basket of goods used for inflation calculation. It’s generally in the 3.4% to 3.6% range of total costs. Over the past year, mortgage rates have plummeted. For example, the 5-year fixed posted rate dropped about 19.11% over the past year. The sharp drop means you would get a big discount if you were renewing, or delayed purchasing a home. However, it means pretty much nothing if you were locked into a rate or didn’t have a mortgage. 

Constructing a CPI basket that’s a neat fit for everyone is a difficult task, and difficult to not include excess. The difference between including and excluding a single component shouldn’t be so volatile. Although, trying to gauge inflation in an economy where a large number of components can’t be accessed at usual volume, is a futile task in itself. 

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  • Timmy 3 years ago

    Statistics Canada also tried to lower inflation in the middle of the pandemic, which is just too funny. They apparently received so many complaints, they had to go back to the old methodology.

  • Bob Walter 3 years ago

    The whole inflation basket is a bad tool. Just look at what pretty much all commodities have done over the last while. Rise: gold, copper, zink, corn, coffee … Up 10, 20, 40% Heck even oil is up 50% and most of us aren’t commuting like we did so where is the demand.

    Look at what you are paying at the supermarket and say your bill is only 1% higher than last year.

    Now compare that to the “1.0%” official inflation. The only reason why the inflation is this fabricated number is because government spending and pensions are indexed to it, to there is a need to keep it down.

  • Huh ? 3 years ago

    I don’t recall this “story” back when inflation excluding mortgages was lower than with.

    Maybe that wasn’t a story.

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