Last week Statistics Canada confirmed that our Consumer Price Index (CPI) increased from 2.4% in March to 2.8% in April on a year-over-year (y/y) basis.
The consensus had forecast that our CPI would spike even higher, to 3.1%.
To no one’s surprise, last month’s inflation surge was almost entirely tied to higher energy prices. Our gasoline prices increased by 28.6% in April (y/y), and overall energy prices increased by 19.2% (y/y).
What did come as a surprise to many market watchers was that there were few signs that higher energy prices were stoking inflation elsewhere in our economy.
Our CPI ex-energy decelerated from 2.2% in March to 2.0% in April. The Bank of Canada’s (BoC) key measures of core inflation, CPI-trim & CPI-Median, decreased to 2% and 2.1% (y/y) respectively. Inflation in services overall decreased from 2.6% in March to 1.7% in April (y/y). Even food inflation decreased from 4.0% in March to 3.5% in April (y/y).
Higher energy costs displace other forms of spending because it is difficult for consumers to adjust their energy usage and/or to switch to cheaper, alternative forms. More spending on energy results in less spending elsewhere.
To wit, last week Statistics Canada also confirmed that our core retail sales, which exclude gasoline stations, fuel vendors, and motor vehicle and parts dealers, were down 0.1% in March on a month-over-month basis.
Higher energy prices will trigger broader inflation across our economy. The question is by how much. Last month’s inflation data bolster my view that the broader inflationary impact from spiking energy prices will take longer to accrue than bond-market investors expect and will have less overall impact than they are currently pricing into our Government of Canada (GoC) bond yields.
The Latest on Mortgage Rates
GoC bond yields moved slightly lower last week. They were helped by Stats Can’s less-hot-than-expected April inflation data and by a partial retracement in oil prices linked to hopes of de-escalation in the US/Iran war.
Bond-market investors pared back their bets on the number of BoC rate hikes in 2026, but they are still betting on between one and two 0.25% hikes this year.
I see little chance of that happening.
Simply put, the BoC didn’t sound like it wanted to hike at its most recent policy-rate meeting, and the inflation data aren’t compelling it to do so.
My Take on Today’s Mortgage Options
My advice is unchanged from last week. Fixed rates are likely to remain volatile.
Three- and five-year fixed rates remain the most popular choices. If the spread between those two options is minimal, I think five-year fixed rates offer better value. their appeal.
That said, the relative saving offered by today’s variable rates has increased now that spiking bond yields are putting significant near-term pressure on fixed mortgage rates.
I expect that variable mortgage rates will produce the lowest borrowing cost over their full five-year terms, although the potential that they will take borrowers on a bumpy ride has increased since the start of the US/Iran war.
BoC Governor Macklem has confirmed that the Bank will look through the current inflation spike over the near term. But if the war drags on and its associated inflationary impacts become broader and more entrenched, there may come a time when the Bank is compelled to tighten.
For now, my assessment is that we won’t get to that point. But so much depends on how long the war will last and if/when the Strait of Hormuz will re-open.
Important note: Anyone choosing a variable rate should do so only if they are comfortable with its inherent potential for volatility. Borrowers must also have the financial capacity to withstand higher costs (and in some cases, higher payments).
Insider’s Tip for Borrowers
If you’re in the market for a mortgage, instead of focusing on how much you can borrow, you will be far better off in the long run by focusing on how much you can (conservatively) afford to pay.
A lender doesn’t care if you ever save for retirement, take a vacation, or go out for a nice dinner. So when you decide how much you will borrow, focus on what works for your budget, not on the maximum amount you can borrow.
This post offers advice on how to work out a reasonable mortgage budget using two different approaches: the easy way and the hard way.
Three Posts Every New Visitor to My Blog Should Read
1. Should Canadians Choose a Fixed or Variable Mortgage Rate During a Trade War?
This post provides a detailed comparison of the pros and cons of fixed- and variable-rate mortgages amidst trade-related economic uncertainty.
2. What Every Canadian Borrower Needs to Know About Fixed-Rate Mortgage Penalties
For myriad reasons, some of them unanticipated, many Canadians end up having to break their fixed-rate mortgages. This post provides a detailed breakdown of the very different ways that lenders calculate their fixed-rate mortgage penalties. The amounts charged can vary significantly from lender to lender.
This post provides a detailed summary of the key terms and conditions to pay attention to in your mortgage contract. (They are not standard and can vary in important ways.)
David Larock is an independent full-time mortgage broker and industry insider who works with Canadian borrowers from coast to coast. David's posts appear on Mondays on this blog, Move Smartly, and on his blog, Integrated Mortgage Planners/blog.