Last week Statistics Canada confirmed that our headline Consumer Price Index (CPI) increased from 2.8% to 3.3% in July (annualized).
An inflation uptick had been widely expected because comparisons to price increases a year ago are now less favourable, but the July result still exceeded the consensus forecast of 3%.
Our CPI increased by a surprising 0.6% on a month-over-month basis in July. That price pressure was also broadly based (prices accelerated in five of the seven sub-categories that make up our CPI basket).
I have updated the chart below, which I originally drafted four weeks ago, to include this latest month-over-month result. It shows what will happen to our headline CPI if we average monthly prints of 0.0%, +0.1%, +0.2%, +0.3% and +0.4% over the five remaining months of 2023.
At this point we’ll be lucky if our CPI finishes the year in the mid-4% range.
As I warned in this recent post, our July inflation results are just the beginning. There will be plenty of additional upward pressure on our CPI over the remainder of this year.
Consider the following:
Last month’s CPI data bolster the belief that a higher-for-longer rate path will be needed to bring inflation to heel, and bond-market investors are increasingly pricing in that view. The bond-futures market has now increased the odds of a BoC rate hike at its next meeting to about 33%, and it is assigning a 90% probability of another 0.25% increase by the end of the year.
Some market watchers are pointing to signs that our economic momentum is finally starting to slow to assuage concerns about last month’s CPI results. It’s true that consumer spending is down, credit-card utilization rates are up, and the supply of labour is increasing more rapidly than its demand. But those details miss a key point that I will keep emphasizing.
Slowing growth and a cooling job market are necessary but not sufficient conditions for returning inflation to target. The BoC’s monetary-policy tightening can’t influence every price, and the ones beyond its control will also influence how long it takes to return to 2%. (Commodity prices are one prominent example, and many of those are still running hot.)
In the meantime, while we can continue to speculate about where inflation and mortgage rates are headed, it’s clear that, post pandemic, almost all the surprises relating to both topics have been to the high side.
The Bottom Line: Government of Canada (GoC) bond yields followed their global counterparts higher last week, and fixed mortgage rates could ratchet up again this week.
I continue to believe that today’s three-year fixed rates are a good option for conservative borrowers because they are significantly cheaper than shorter-term fixed rates, and because they also reduce the risk that borrowers will be paying an above-market rate in the latter part of their term (when compared to five-year fixed-rate options).
Five-year variable-rate discounts were unchanged last week.
Last month’s inflation data and the newly forming headwind from CPI base effects reinforce my belief that we will see at least one more 0.25% BoC rate hike (and variable-rate increase) before the year is out.
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.