According to a report by Edge Realty, there appears to be some progress in controlling inflation, but it’s important to keep an eye on the amount of money in circulation. Core inflation, which excludes volatile items like food and energy, increased by only 0.1% in February. Over the past three months, it has gone up by just 0.3%, which is the slowest growth rate we’ve seen since late 2020.
Source: Edge Realty Analytics
Similarly, the Bank of Canada’s preferred measures of core inflation were lower than expected, averaging just 3.1%.
Mortgage Interest
Mortgage interest expenses are still contributing 0.8% to the overall Consumer Price Index (CPI). In many countries, interest rates are typically excluded from the CPI calculation to prevent a situation where changes in interest rates prompt further adjustments by the central bank, creating a circular effect. However, in Canada, mortgage interest costs are included, and they have been increasing significantly. As a result, they currently make up 80 basis points, or 0.8% of the total CPI.
Source: Edge Realty Analytics
Excluding mortgage interest expenses, the headline CPI would be exactly on target at 2% for the second consecutive month, aligning with the Bank of Canada’s goal. However, rented accommodations remain a significant challenge for the Bank of Canada. The index for rented accommodations increased by 7.9% year-on-year, contributing over 50 basis points (0.5%) to the overall headline CPI.
Source: Edge Realty Analytics
Rent Growth
As the population is likely reaching its peak after a boom in growth and an expected sharp decline of non-permanent residents, there will also be a reflected, similar peak in rent growth later this year, since there is a strong connection between non-permanent residents and rental prices.
Source: Edge Realty Analytics
Stuck Rates
We’re currently in a situation where interest rates are in a state of uncertainty until the Bank of Canada takes decisive action. Despite the positive inflation data, it hasn’t significantly changed the expected trajectory of interest rates for this year. Market expectations suggest an increase of 75 basis points (0.75%) by 2024, with the first hike likely to occur in June. As a result, the benchmark 5-year bond yield has remained relatively stable, hovering around the 3.5% mark for the majority of the past month.
Source: Edge Realty Analytics
It’s likely that current mortgage rates will remain stable until the Bank of Canada takes decisive action. In fact, rates have stayed relatively unchanged over the past three weeks. As the spring housing market becomes more active, there might be some slight decreases due to aggressive discounting. However, significant changes in rates are not expected until the Bank’s plans are clearer.
Conflicting Forces
We’re now reaching a point where certain factors that have been driving inflation over the past two years will start to fade from the data due to base effects. This is especially true for mortgage interest costs.
It’s important to remember that inflation measures the rate of change. Even if prices are high, if they have stayed steady for a year, the inflation rate drops to zero. This creates space to accommodate other inflationary pressures, such as the recent increase in gasoline prices, while still keeping the headline CPI at or below 3%.
However, we should keep an eye on the recent resurgence in money supply growth. M2, a widely-followed measure of broad money, has increased by over 2% in the past three months alone. If everything else remains constant, having more money circulating in the economy increases the potential for inflation.
Source: Edge Realty Analytics
Counterbalancing this trend are continued indications that the economy is slowing down faster than the Bank of Canada appears to acknowledge, according to the Edge Realty report. One recent piece of evidence comes from new data released on March 21st by Statistics Canada, which examines the credit liabilities of Canadian businesses.
In January, non-mortgage loans outstanding decreased by 1.2% month-over-month, marking the second consecutive decline and the most significant monthly drop since 2020. Similarly, total credit liabilities, which encompass various forms of borrowing beyond bank loans, also decreased for the second consecutive month. This has resulted in negative growth over a three-month period for the first time since the middle of 2020.
Source: Edge Realty Analytics
This may indicate that either businesses are hesitant to borrow money, or banks and other lending institutions are reluctant to lend. Whichever the case, it’s concerning. When businesses pull back on borrowing, the next likely step is to start cutting jobs.
Additionally, recent data indicates a decline in the number of active businesses. In December, there was a 0.2% month-over-month seasonally-adjusted decrease, driven by the highest number of business closures since June 2020. Over the past six months, there has been a 0.5% drop in active businesses. There has not been such a negative trend over a six-month period since the third quarter of 2020.
Source: Edge Realty Analytics
There are indications that this is having a negative impact on jobs, as the labour market is cooling down. For instance, the most recent data on Employment Insurance claims shows a 4.2% month-over-month increase nationwide in January. This rise is especially noteworthy in Ontario, where claims have reached their highest level in two years.
Source: Edge Realty Analytics
Ultimately, the Edge Realty report predicts that, by summer, the Bank of Canada may realize the economy is buckling under high interest rates and might consider larger rate cuts, possibly totalling around 1.50% by the year’s end.
