'We're on the edge of a recession here': Antunes on rates following StatCan data

Key Concepts

• Headline Inflation: The overall inflation rate, including all goods and services.
• Core Inflation: Inflation excluding volatile components like food and energy, often used by central banks to gauge underlying price pressures.
• Carbon Tax: A tax levied on the carbon content of fuels, intended to reduce greenhouse gas emissions.
• Tariffs: Taxes imposed on imported goods.
• Deglobalization: A trend of decreasing economic interdependence between countries.
• GDP (Gross Domestic Product): The total monetary value of all the finished goods and services produced within a country's borders in a specific time period.
• Recession: A significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.

October Inflation Data and Drivers

The headline inflation rate for October was reported at a relatively low 2.2%. This moderation was primarily attributed to:

• Lower Gas Prices: A significant factor contributing to the decrease.
• Lower Grocery Prices: While some grocery prices increased, others trended downwards, contributing to the overall moderation.
• Reduction in Carbon Tax: Pedro Antunes, Chief Economist at the Conference Board of Canada, highlighted that the reduction in the carbon tax specifically took approximately 0.7 percentage points off the average inflation rate.

However, Antunes cautioned that for households not purchasing gasoline, inflation is still running at a pace of around 3%.

Home Ownership and Rental Costs

While overall home ownership costs are showing a general decline, there remains significant pressure on renters, with the rent component of inflation continuing to increase at a notable pace.

Cell Service Costs

An interesting observation was an increase in cell service costs in the latest month. This is noteworthy because cell costs have been steadily decreasing since 2023, with an overall reduction of about 20% over the past two years. The recent uptick might signal a change in this trend, though further observation is needed.

Property Taxes

Statistics Canada also reported on property taxes, indicating they are running quite high, around 5-6% for most provinces. Some provinces have introduced new property taxes, which are further pushing up inflation in those specific regions. Manitoba was identified as a standout province in this regard.

Core Inflation and Economic Concerns

Despite the tame headline inflation, concerns remain regarding core inflation and the broader economic outlook.

• Economic Slowdown: Antunes expressed concern about the potential impact on the economy. Canada experienced a steep decline in the second quarter, and the third quarter is projected to be flat at best, placing the country on the edge of a recession.
• Bank of Canada's Stance: If the economy worsens, the Bank of Canada might consider interest rate adjustments due to weak economic conditions not signaling significant inflationary pressures. However, if the economy stabilizes or shows slight growth in the fourth quarter, the bank is likely to hold rates steady, barring any dramatic developments.

Tariffs and Trade Uncertainty

The impact of tariffs remains a concern, and consumers may not have seen the full unwinding of these costs.

• Uncertainty for Businesses: Firms are holding back on investment and job creation due to uncertainty about future trade policies.
• Need for Trade Deals: There is a strong need for certainty, particularly regarding trade deals. The renegotiation of CUSMA (Canada-United States-Mexico Agreement) is approaching next year, and stability in trade relations is crucial.
• Pass-Through of Costs: While some retailers initially absorbed tariff costs, there's a possibility of these costs being passed on to consumers later in the year. However, the upcoming Christmas season might influence retailers' decisions to avoid passing on higher costs due to consumer caution.
• Integrated Supply Chains: Due to the intricate ties in supply chains between Canada and the US, the effects of tariffs are still being felt, especially as products are re-imported from the US.
• US Inflationary Pressures: High inflation in the US, partly due to their broader application of tariffs, will inevitably impact Canada due to the close economic integration.
• Deglobalization Effect: Antunes pointed to a "deglobalization effect," most prominent in North America, which will continue to contribute to underlying inflation. He believes it will be challenging to bring inflation back down to the 2% range seen in previous decades, with future challenges anticipated. The power in these circumstances largely rests with the US.

Government Spending and Budgetary Impact

The government's budget and planned spending for the upcoming year are expected to provide some economic stimulus.

• Budgetary Boost: Assuming the spending goes through, and after accounting for departmental cuts, there is an estimated boost of about $30 billion in spending for late this year and into next year.
• Impact on GDP: This $30 billion represents close to 1% of GDP and is expected to provide stimulus, potentially preventing a recession.
• Forecasting: The Conference Board of Canada will incorporate these budgetary measures into their next forecast.
• Hope for Stability: There is hope for stability regarding CUSMA and tariffs, with expectations of a rebound in trade into next year.
• Growth Projections: Similar to the Bank of Canada and other forecasts, the Conference Board anticipates slightly stronger growth, around 1%, not necessarily a full rebound from this year's economic hit, but an improvement in trade performance.

Conclusion

The October inflation data shows a welcome moderation in the headline rate, largely due to lower energy and some food prices, aided by a carbon tax reduction. However, underlying inflationary pressures persist, particularly for renters and due to ongoing tariff impacts and broader deglobalization trends. The Canadian economy is on the precipice of a recession, and while upcoming government spending is expected to provide some stimulus, significant uncertainty remains regarding trade relations and the full pass-through of costs. The Conference Board of Canada anticipates a modest economic rebound in the coming year, contingent on stability in trade and the effective implementation of budgetary measures.