Canadian Inflation Falls Within Bank of Canada’s Target Range; Food and Shelter Costs Remain High

General Robyn McLean 19 Jul

Is this a sign of better news to come? Some insight on the latest inflation data and what it means to Canadians from Dr. Sherry Cooper, Chief Economist for Dominion Lending Centres.

Canadian Inflation Falls Within Bank of Canada’s Target Range; Food and Shelter Costs Remain High
June inflation data released today by Statistics Canada showed that the Consumer Price Index (CPI) rose 2.8% year-over-year (y/y), slightly below expectations. This was the lowest CPI reading since February 2022.

The decline in inflation was mainly due to lower energy prices, which fell by 21.6% y/y. Without this decline, headline CPI inflation would have been 4.0%. The year-over-year decrease resulted from elevated prices in June 2022 amid higher global demand for crude oil as China, the largest importer of crude oil, eased some COVID-19 public health restrictions. In June 2023, consumers paid 1.9% more at the pump compared with May.Food and shelter costs remained the two most significant contributors to inflation, rising by 9.1% y/y and 4.8% y/y, respectively. Food prices at stores have risen nearly 20% in the past two years, the most significant rise in over 40 years. Shelter inflation rose slightly from 4.7% y/y in May.

The largest contributors within the food component were meat (+6.9%), bakery products (+12.9%), dairy products (+7.4%) and other food preparations (+10.2%). Fresh fruit prices grew at a faster pace year over year in June (+10.4%) than in May (+5.7%), driven, in part, by a 30.0% month-over-month increase in the price of grapes.

Food purchased from restaurants continued to contribute to the headline CPI increase, albeit at a slower year-over-year pace in June (+6.6%) than in May (+6.8%).

Services inflation cooled to 4.2% y/y from 4.8% y/y in May. This was due to smaller increases in travel tours and cellular services.

The Bank of Canada’s target range for inflation is 1% to 3%. While June’s inflation reading was within the target range, it is still higher than the Bank would like. The Bank raised the overnight policy rate twice in the past two months to reduce the stickier elements of inflation.

There were signs of easing price pressures for consumer goods also. Durable goods inflation continued to cool to 0.8% y/y in June. Passenger vehicle prices rose slower in June (+2.4%) than in May (+3.2%). The year-over-year slowdown resulted from a base-year effect, with a 1.5% month-over-month increase in June 2022 replaced with a more minor 0.6% month-over-month increase in June 2023. This coincided with improved supply chains and inventories compared with a year ago. Household furniture and equipment was up only 0.1% y/y in June, down from a peak of 10.5% last June.

The June inflation data provides some relief to consumers, but it is clear that food and shelter costs remain a major concern. The Bank of Canada will closely monitor inflation in the coming months to see if it is on track to return to its 2% target. There is another CPI report before the Bank meets again on September 6th.

The Bank of Canada’s underlying inflation measures cooled further in May. CPI-trim eased to 3.7%y/y in June from 3.8% y/y in May, and CPI-median registered 3.9% versus 4.0% y/y in May. The chart below shows the closely watched measure of underlying price pressures, the three-month moving average annualized of the core measures of CPI. They continue to be just under 4%.

Canadian inflation continued to make encouraging progress in June. However, the cooling in headline inflation benefits from sizeable base effects due to the favourable comparison to high energy prices last June. The Bank of Canada (BoC) is watching its preferred core measures, which continue to show glacial progress.

Bottom Line

It takes time for the full effect of interest rate hikes to feed into the CPI. Mortgage interest costs will continue to rise as higher interest rates flow gradually through to household mortgage payments with a lag as contracts are renewed.

BoC Governor Macklem emphasized last week that the Bank has become worried about the persistence of underlying inflation pressures in the economy. The June inflation data likely provides some reassurance that things are moving in the right direction, but not fast enough for the Bank of Canada to let its guard down.

The BoC is facing a difficult balancing act. It needs to raise interest rates enough to bring inflation under control, but it also needs to be careful not to raise rates so high that it causes a recession. The next few months will be critical for the BoC as it assesses the risks of inflation and recession.


Bank of Canada June Rate Hike Spooks the Housing Market

General Robyn McLean 17 Jul

The latest interest rate hike and how it has impacted the housing market from Dr. Sherry Cooper, Chief Economist for Doiminion Lending Centres. 

Bank of Canada June Rate Hike Spooks the Housing Market
The Canadian Real Estate Association says the BoC’s surprise rate hike in early June cooled activity following a two-month solid start to the spring housing season. Home sales posted a 1.5% gain between May and June, tepid by recent standards. Sales were up in June in a little over half of all local markets, with increases in British Columbia and Alberta offsetting fewer sales in the Greater Toronto Area (GTA).

On a year-over-year (y/y) basis, the number of transactions in June grew by 4.7%. According to Shaun Cathcart, CREA’s Senior Economist, “History suggests the price side of things will respond to this with only a slight lag. Add to that the recent Bank of Canada rate hikes, and we can probably expect price growth to be moderate in the months ahead, likely still with some degree of upward pressure, but less than in the last three months.”

The CREA cut its forecast for home sales this year as tight inventory, and the rate hikes weigh on the housing market. The CREA now estimates that sales in 2023 will be down 6.8% from a year earlier, a more dramatic slowdown than the 1.1% decline forecast in April.

“With the Bank of Canada unexpectedly ending its pause on rate hikes in June and hiking again in July, a major source of uncertainty has returned to the housing market,” the CREA said.

New Listings

The number of newly listed homes was up 5.9% month-over-month in June. Building on gains of 3.1% in April and 7.6% in May, new listings have gone from a 20-year low in March to closer to (but still below) average heading into the summer.

With new listings outperforming sales in June, the sales-to-new listings ratio eased to 63.6% compared to 66.4% in May and a recent peak of 68.3% in April. The measure remains well above the long-term average of 55.2%.

There were 3.1 months of inventory on a national basis at the end of June 2023, unchanged from the end of May and down more than an entire month from the most recent peak at the end of January. The long-term average for this measure is about five months.

Home Prices

The Aggregate Composite MLS® Home Price Index (HPI) climbed 2% month-over-month in June 2023—a significant increase for a single month on the heels of similar gains in April and May. It was again very broadly based, with a monthly price increase between May and June observed in most local markets.

The Aggregate Composite MLS® HPI now sits 4.5% below year-ago levels, the smallest decline since November 2022.

Bottom Line

Home construction in Calgary, the home to the Canadian energy industry headquarters, is booming, driven by a rush of newcomers from abroad, as well as from more expensive housing markets in the rest of Canada.

Home prices in Calgary have risen 4.2% in a year, the most significant rise among the more than 50 markets the CREA tracks. It’s the only major Canadian city to experience any increase at all. The benchmark price in the city has risen 34% in three years.

Alberta’s population was 4.7 million as of April 1, up 4.5% in 12 months, trailing only tiny Prince Edward Island for the fastest growth among Canada’s provinces. In the first quarter, Alberta had the largest net interprovincial gain — almost 15,800 people — of the country’s provinces and territories. International migration contributed to nearly 36,000 new residents.

Unlike previous surges in Alberta’s population driven by the oil industry’s demand for labour, this boom is happening during a relatively tame period for the province’s most important industry.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres