We've been sounding the alarm for weeks, cautioning that the inflation report was about to unleash a shocker. And it did not disappoint. StatsCan delivered a headline that's more than just bad.
Canada's inflation dragon has reawakened, roaring at 4%. Here are the fiery details:
Annual inflation: 4.0%, up from July's 3.3% (consensus: 3.8%)
Monthly inflation: Increased by 0.4% (consensus: 0.2%)
Average core inflation (year-over-year): 4.0% vs. July's 3.75%
Average core inflation (3-month): 4.5% vs. July's 3.5%
Crude oil played a significant role this month, soaring to an 11-month high near $93/bbl. Technical analysis hints at further increases, possibly reaching $95 or more, barring any contrary news.
Mortgage interest expenses and rental costs also played a role. However, Capital Economics suggests that this is somewhat due to the delayed response to the Bank's rate increases in June and July, so the growth in housing prices is expected to decelerate in the near future.
What truly has the Bank of Canada on high alert are the core indicators, particularly the 3-month figures. Earlier, the Bank had expressed concerns about these fundamental trends appearing to hover around the 3.5% mark. BMO Economics' latest report indicates that this previous view now appears rather outdated.
Canada's 4-year swap rate, a leading indicator for fixed mortgage rates, is surging, up 10 bps as we write.
Chances of an October 25 BoC rate hike have doubled to 41%, with another hike fully priced in by Q1 2024. If another 25 bps BoC hike occurs, it's likely to be sooner than expected.
Cuts are off the table for the next 12 months, as shown in this OIS-implied rate table from Refinitiv Eikon.
The Future of Inflation
Navigating the path to 2% inflation is a twisted journey, and this one has a few more turns ahead.
"50% of the CPI basket is still rising at a pace faster than 5% per year," warns Desjardins Economics. "This won't sit well with the Bank of Canada."
Despite today's CPI surprise, most economists predict the BoC will maintain its 5.00% overnight rate, citing a slowing economy. However, Governor Macklem is unlikely to let 4% inflation headlines stoke the fires.
“The longer high inflation persists, the greater the risk that elevated inflation becomes entrenched, making it more difficult to restore price stability,” Macklem cautioned recently.
So, if StatsCan springs another monstrous CPI report on October 17 (just in time for the BoC's October 25 meeting), don't be surprised to see a rate hike. Even if unemployment rises to 5.6% on October 6, as consensus projects.
BMO Economics adds more concern, noting, "...The early read on September inflation isn't great either, as the base effects remain challenging (prices rose by just under 0.1% a year ago) and energy prices continue to surge."
As for the BoC, its latest (July) inflation forecast of 3.3% for this quarter seems modest now. Even when excluding mortgage interest, annual inflation stands at a robust 3.2%, above the Bank's 3% limit.
One thing we can count on is more hawkish BoC talk. That's about as welcome in the bond market as a skunk at a garden party. Higher yields pose real risks for fixed mortgage rates in the near term. It might be the right time to secure those fixed-rate holds.
Contact me today to discuss the impact of these developments on your financial planning.