First housing, now everything else. Statistics Canada (StatsCan) numbers show the cost of living is rising faster than anticipated. The Consumer Price Index (CPI), a common measure of inflations, showed a huge jump over the past 12 months. This jump was spread across the country, but Toronto and Vancouver observed even higher than average increases.
The Consumer Price Index and The Cost of Borrowing
CPI is the most widely used measure of inflation in Canada. They take a basket of goods and services, i.e. things the majority of people use, and track the changes in costs. When the CPI goes higher, it means the cost of living in Canada is rising. When it goes lower, it means the cost of living is getting lower (that doesn’t happen often). The number is then used to adjust the real value of wages, pensions, and most important – interest rates.
The Bank of Canada relies on CPI to determine the cost of borrowing, by raising or lowering its policy interest rate. The Bank sets a target for the policy interest rate, which is 2% right now, and makes decisions based on how far CPI deviates. If it’s above 2%, the Bank is likely to raise rates, to slow borrowing. If it’s below, the bank is likely to slash rates, in order to stimulate borrowing. More factors are considered, but this is one of the big ones. It takes six to eight quarters to see the full impact of a policy interest rate change. So don’t expect an above 2% print to result in immediately higher rates.
Canada’s CPI Is Now At 2.2%
The rate of CPI for all of Canada spiked in February. StatsCan noted CPI rose 2.16% over 12 months, the fastest pace of growth since October 2014. The cost of living across the country is now 32.5% higher than it was in 2002. Of that increase, 7.99% was over the past 5 years. Despite the huge jump on this month’s read, we’ve been averaging -20.1% below target over the past 5 years.
Source: Statistics Canada. Better Dwelling.
StatsCan noted there was just a few categories responsible for most of the gains. Main contributors were gasoline, food from restaurants, passenger vehicles, homeowner replacement costs, and mortgage interest costs. A weaker loonie, an increase in minimum wages, and higher interest rates are the principal drivers of these costs.
Source: Statistics Canada. Better Dwelling.
The Cost of Living In Toronto Is Rising Over 22% Faster
As you might guess, the cost of living in Toronto is rising faster than the rest of Canada. StatsCan reported a 12 month CPI increase of 2.64% for Toronto, which is 22.22% faster than the rest of the country. Cost of living is now 36% higher than it was in 2002. Just over 10.66% of those points occurred in the past 5 years.
The Cost of Living In Vancouver Is Rising Over 51% Faster
Vancouver continues to see the cost of living rise at a rapid pace. StatsCan reported CPI made a 12 month increase of 3.27%, which is 51.38% faster than the rest of Canada. Since 2002, the cost of living in Vancouver has increased 29.6% officially. The past 5 years have only represented an 8.18% rise in the cost of living. Yes, the country’s most expensive real estate market has apparently only seen the cost of living rise just a tiny bit higher than the rest of the country. Hm…
Canada has seen a massive rise in the cost of housing, and since housing is need by everyone – we should expect almost everything to get more expensive. This is especially true for places that depend on services, such as major cities. Despite the relatively high flying numbers we’re seeing from CPI, these numbers are somewhat sandbagged. Both the method of measurement, and even the need for seasonally adjusting data, are often criticized. Both issues often result in under measurement of rising costs.
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Photo: Paul Pica.
Good job StatsCan. I find it hard to believe that inflation is only 2%, when the cost of housing increased by 20% last year alone. How much do we pay for the government to create fake stats to make us feel better?
So…. your saying we are gonna have interest rate hikes …. what’s the worst that can happen?
Someone please correct me here if I am missing something;
But does this not set us up for what I am going to call an inflationary feedback loop.
1. Rates go up, debt service goes up on record debt levels, as a result it looks like inflation is spiking.
2. BOC responds by raising rates to fight inflation
3. debt service on record debt levels goes up further leading to further inflation spikes.
4. BOC raises rates to fight inflation.
On the way up it was almost a deflationary feedback loop
1. Rates go down, debt service gets easier, looks like inflation subdued.
2. BOC lowers rates or keeps them down.
If the housing cost portion of CPI allowed for debt payment as well as total debt I feel it would be much more accurate…….. but i guess it would not allow for big asset swings which wouldnt be very fun for the speculators.
If easy money is spread out over the economy and isn’t only pumped into assets maybe the CPI is a good measure and maybe I am thinking about this way to simply, but it seems to me that the current CPI measurement sets society up for a debt trap.
Technically, yes. But they also take DSR levels into consideration, so that helps to break it in theory. We’re historically low DSR levels though, so I’m not 100% sure that’s going to stop it anytime soon.
Central banking is more of a shit show than people think it is. Japan is a good example of what happens when you do this. Eventually the Bank of Japan had to start buying stocks. Now the CB owns 30% of all ETFs. When capitalism loses its downside potential, you end up with a perverse form of socialism, that only benefits those with large asset holdings.
Yeah but that is assuming it can rinse and repeat. If the CPI is over weighted with housing, which I have to assume is the case then what should happen is a recession as the debt obligation, which is increasing, forces society to contract. The BoC isn’t concerned with general inflation. They need to cut out the cancer that is cheap money.
CPI is severely underweighted on housing. Mortgage rates, of all things, are a part of the index (and should not be). But the price of houses is nowhere to be seen in the index. Rents are. At the very least. they should remove mortgage rates completely, and replace it with some sort of housing price index. It’s the Consumer Price Index after all. Not the cost of borrowing money index.
The cost of borrowing money or carrying debt should never be included in a CPI.
Rising inflation and other economic factors like low unemployment forces the BOC to raise rates. This causes the cost to service debt to rise as well. However, with rate increases, liquidity decreases in the market, leading to lower inflation. One of the key drivers of the housing bubble was “cheap and easily accessible credit”…. liquidity.
Appreciate the feedback guys. I know they cant just start raising rates indefinitely, there is definitely a breaking point for household debt levels. Once we hit that breaking point I assume its going to trigger something very deflationary in our economy, as defaults occur, job loss, etc. I just feel we are now in a situation where rate increases vs inflation will become a self prophecy until that breaking point is reached.
I guess with all asset bubbles the tipping point is inevitable, just starting to see/understand/suspect how some of our measurements are not only ineffective but how much they can actually magnify the positive/eventual negative feedback loop with how these asset bubbles form and burst. Guess I am just naive.
You wrote “I just feel we are now in a situation where rate increases vs inflation will become a self prophecy until that breaking point is reached.”
Yes you’re articulating it so well! This is such idiocy, it’s a positive feedback loop plus Ontario’s Wynne-inum Wage will give Poloz excuses to hike until it falls off the CN tower and rolls over into the lake. “it” being housing and with it, the rest of the Canadian economy.
What you are referring to is the distortion caused by having mortgage rates included in the CPI, but housing prices absent from the CPI. Mortgage rate increases, all things being equal, will have the effect of boosting the CPI. Meanwhile, rate increases are precisely the tool used by the BoC to control money supply growth and therefore inflation.
The obvious solution is to get housing prices into the CPI and mortgage rates out. However, the timing of when they do so is crucial. I would not want them to do that now. If housing prices start falling (and they are) then suddenly we could end up with DEFLATION!!! when in fact they just happened to introduce housing prices to the index at the worst possible time.
I’d like to see – at some point after the housing correction has largely run its course – the removal of mortgage rates and the inclusion of a house price component (actual sticker price, not “carrying cost” or “rental equivalent” or other such nonsense) in the CPI.
The CPI should measure how much a given dollar can purchase at any given time. Not how much can be purchased after considering borrowing costs.
Makes sense that major cities would have more upward inflation pressure, imagine the added difficulties of transporting goods to stores in Toronto with the crap-circus that is Toronto’s traffic. Then compare it to basically anywhere out of the GTA.
I’m sure there are many factors, and I’m certainly no expert, but I think the additional increase in cities is likely the result of better wages, and in turn, access to more credit.