Inflation has likely peaked from a rate of change perspective, dropping to 7.6% year-over-year in July, down from 8.1% in June. However, we are far from out of the woods. What’s interesting here are the comments from Bank of Canada Governor, Tiff Macklem, immediately following the release. It’s not often you see the Bank of Canada issue an op-ed immediately following a CPI print.

“As the central bank, it’s our job to control inflation and that means we need to cool things down. That’s why we have been raising interest rates since March. In July, we took the unusual step of raising the policy interest rate by a full percentage point, to 2.5 per cent. Increasing our policy rate raises borrowing costs across the economy — for things like personal loans, car loans, and mortgages. And when we increase the cost of borrowing, consumers tend to borrow and spend less and save more. We need to slow down spending to allow supply time to catch up with demand and take the steam out of inflation.

One area of the economy where it is easy to see how this works is the housing market. With higher mortgage costs, housing activity has slowed quickly after unsustainable growth during the pandemic, and housing prices are moderating. As housing slows, peoples’ spending on housing-related goods and services, such as renovations and appliances and furniture, should also slow.

To tame inflation, we need to bring overall demand in the economy into better balance with supply. Our goal is to cool the economy enough to get inflation back to the two per cent target. We don’t want to choke off demand — we want to slow its growth. That’s what we call a soft landing.”

Speaking of housing and soft landings, it looks far from it at the moment. National home sales fell 29% year-over-year in July, and the home price index dropped 1.7% from last month. National home prices are now down 9.9% since peaking in March, which now marks the deepest correction in the home price index since its creation in 2005. This price correction is only five months old and has already surpassed the 2008-09 downturn. Sure, prices were artificially inflated, it doesn’t mean people haven’t borrowed against those valuations, or that banks aren’t using them as a collateral.

It’s worth noting that Ontario continues to be the largest offender when it comes to dragging national prices lower. Here’s how much prices have dropped from their peak earlier this year:

• Toronto -13.2%
• Ottawa -7.4%
• Winnipeg -4.8%
• Vancouver -4.5%
• Montreal -4%
• Victoria -1%
• Calgary -0.7%

Markets are now pricing in a 75bps rate hike from the Bank of Canada in September, which surely dampens the hopes for any soft landing. Looking forward, we also need to chat about tigger rates, as they’ll certainly be a few once the BoC lifts rates in September. Per the always insightful Rob Mclister, banks haven’t provided a whole lot of clarity on how they plan to deal with trigger rates. However, the best educated guess at the moment suggests that for every 25bps above your trigger rate, one should expect a $125 increase to their monthly mortgage payment for every $500k borrowed. If you’ve got a million dollar mortgage you should expect a $250 increase in your payment. Manageable, but more of an issue at renewal if rates stay elevated.

To suggest these will be challenging times ahead is an understatement. Getting inflation down from 40 year highs to tolerable levels will come with pain. If only we had the foresight to see that printing copious sums of money and reducing the cost of borrowing to zero would come at a cost. Maybe next time.

Three Things I’m Watching:

1. This is the steepest house price decline Canadians have seen in nearly two decades. (Source: CREA, Steve Saretsky)

2. Toronto is dragging national home prices lower. (Source: CREA)

3. Canadians are losing purchasing power as wages are not keeping up with inflation. (Source: Bloomberg)