July 24, 2023 | A Price to Pay

Happy Monday Morning!

CPI headline inflation came in lower than expected this past week. Markets were calling for 3% and we got 2.8%, a pleasant surprise and back to its lowest levels since March 2021. Perhaps the 475bps of rate hikes are finally starting to work their way through the system?

We are back within the BoC’s target range of 1-3%. If you strip out mortgage interest costs, which were up 30% year-over-year and are entirely self-inflicted by the Bank of Canada, then headline inflation sits right at 2%.

And yes, I know about gasoline prices.

Please don’t misconstrue this as problem solved. We all know inflation has been pervasive over the last couple of years. It has wrecked havoc on the bottom half of society. That price growth is now baked into the cake, and prices are not going down, they’re just going up a lot less than they used to.

However, if you’re skeptical about government inflation data then i’d encourage you take a look at Truflation.com. Inflation peaked at 11% in the US and is now running at 2.3%. Central banks have already over tightened, they just don’t know it yet.

I wouldn’t be surprised if inflation continued to surprise to the downside. There’s a lot of debt in this country that is suffocating on bloated interest payments.

However, you also can’t rule out another wave of inflation. Remember the federal government is projected to run a $40B deficit this year. You also have political leaders advocating for mortgage subsidies.

This comes on the heels of the FCAC (aka Chrystia Freeland) asking the banks to work on extending mortgage amortizations for stressed borrowers. This line of thinking from the coalition government will keep interest rates higher for longer.

Until we get a bit more economic certainty, things will continue to muddle along. Housing activity remains incredibly benign, both on the sales and listing side. People can’t afford to move so they’re simply staying put. Housing activity here in Vancouver is tracking well below historical averages for the month of July, some of the lowest levels of activity we’ve seen in nearly two decades.

Meanwhile, the building boom various levels of government keep promising remains illusive, creating a huge hurdle for future growth on the back of rampant immigration. A recent note from BMO provides a rather bleak outlook.

“Strapped by worker shortages, higher borrowing costs, and building restrictions, Canadian homebuilders don’t appear to be on the path to double housing construction over the next decade to ease affordability strains. In fact, quite the opposite. In constant dollars, investment in residential construction fell for the eighth time in 10 months in May, down 15% in the past year to levels prevailing in the early days of the pandemic, and below the norm of the past decade.”

If this continues much longer there will be a steep price to pay a few years from now. Until then, we can continue to argue about the weighting of the CPI basket and whether inflation is 2.8% or 3.2%.

Steve Saretsky July 24th, 2023

Posted In: The Saretsky Report

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