Canada's inflation slowed slightly to 2.3% last month

Key Concepts

• CPI (Consumer Price Index): A measure of the average change over time in the prices paid by urban consumers for a basket of consumer goods and services.
• Disinflation: A decrease in the rate of inflation.
• Deflation: A decrease in the general price level of goods and services.
• Headline CPI: CPI calculated including volatile items like food and energy.
• Core CPI: CPI calculated excluding volatile items, providing a clearer picture of underlying inflation trends.
• USMC (United States-Mexico-Canada Agreement): A free trade agreement governing trade between the three countries.
• Neutral Rate: The interest rate that neither stimulates nor restricts economic growth.

Inflation Slowdown and Economic Outlook

The inflation rate in Canada slowed to 2.3% last month, slightly below economists’ expectations of 2.4%. This deceleration is partially attributed to the expiration of a temporary Goods and Services Tax (GST) cut implemented by the federal government a year prior, which had lowered prices for items like alcohol and restaurant meals. Despite this, the current inflation rate remains a key focus for policymakers.

Interview with Dominique Laant – Macro Strategy, Manulife Investment Management

The discussion then shifts to an interview with Dominique Laant, Director of Macro Strategy at Manulife Investment Management, providing deeper insights into the inflation data and its implications. Laant characterizes the latest report as “very good overall,” noting that without the impact of last year’s tax break, the inflation rate would be very close to the Bank of Canada’s 2% target.

She highlights a consistent trend of struggling to find inflationary pressure in Canada over the past three months, aligning with broader economic indicators. Specifically, wage growth is weak, and companies are not planning significant wage increases. Overall economic growth is also sluggish. Laant believes this situation is “good news for policymakers in the Bank of Canada.”

Company Pricing Power and Input Costs

Laant addresses the question of whether companies can continue to raise prices. She acknowledges that companies previously benefited from raising prices when input costs increased, but are now less inclined to lower prices as input costs decline, particularly at the retail level. However, she emphasizes that companies currently lack the “ability to pass on those input costs” due to slower input cost growth.

Deflation Risk and Shelter Costs

The conversation turns to the risk of deflation. Laant clarifies that outright deflation is “very very far overall,” with inflation still around 2.3%. However, she points to a potential area of deflationary pressure: shelter costs. This is driven by slowing mortgage interest costs (due to lower mortgage rates), slowing or falling home prices in some cities, and decreasing rental prices – a “rare occasion” in Canada. This decline in shelter costs could also impact related expenses like insurance and repairs, offering further relief to consumers.

Regional Rental Market Dynamics

Regarding the weakness in rental prices, Laant explains that the trend is heavily influenced by Toronto and Vancouver, where a surplus of condominiums is being redirected towards the rental market. However, she notes a slowdown in rental price growth even in markets with rent control, such as Montreal. Despite this slowdown, rents remain high relative to incomes, and some areas still experience tight rental markets.

Bank of Canada Monetary Policy Outlook

Laant believes it is “highly unlikely” the Bank of Canada will increase interest rates this year. This assessment stems from the December labor force survey, which showed strong job growth initially leading markets to anticipate rate hikes. However, she presents three reasons for her opposing view:

1. Contained Inflation: The current inflation rate does not pose a significant concern.
2. Weak Economic Growth: Limited economic growth makes a strong inflationary rebound unlikely.
3. Trade Uncertainty: Uncertainty surrounding the USMC renewal process creates significant hesitation for the Bank of Canada to make any policy changes.

She suggests that Tiff Macklem and the Bank of Canada are likely to maintain a “masterful inactivity,” keeping rates slightly below neutral to provide a modest boost to the economy. Laant anticipates a slight pick-up in the housing market by mid-year, but not enough to warrant a significant policy shift.

Notable Quote

“After the December labor force survey… the markets started to incorporate the possibility that the Bank of Canada would hike one time even more than once this year… we’re not of this view.” – Dominique Laant, Director of Macro Strategy, Manulife Investment Management.

Data and Statistics

• Current Inflation Rate: 2.3%
• Economist Expectation (Previous): 2.4%
• Core Inflation (3-month momentum): Slightly below target, around 1.7%
• Bank of Canada’s Inflation Target: 2%

Logical Connections

The discussion progresses logically from a broad overview of the inflation rate to a detailed analysis by a macro strategy expert. The interview explores the factors influencing inflation, potential deflationary risks, and the likely response of the Bank of Canada. The conversation seamlessly connects economic data with policy implications, providing a comprehensive understanding of the current economic landscape.

Conclusion

The Canadian inflation rate has slowed slightly, offering some relief to policymakers. While outright deflation is not imminent, declining shelter costs and weak economic growth suggest limited inflationary pressure. Dominique Laant anticipates the Bank of Canada will remain on hold, prioritizing stability amidst trade uncertainty. The key takeaway is a cautious outlook, with the Bank of Canada likely to maintain its current monetary policy stance unless significant economic shifts occur.