It was a busy week for economic data in Canada. Much of it tended to be optimistic but there is little to suggest the Bank of Canada will not be raising interest rates again on July 12th as mentioned by First National Financial LP.
The Consumer Price Index for May showed the annualized inflation rate slowed to 3.4%, down a full percentage point from April. Much of that decline came from the falling price of fuel. The Bank of Canada’s measures of Core inflation, which strip out volatile items like fuel and food, were also down. However, they all remain above the Bank’s 2.0% target.
Unfortunately, the Bank’s interest rate hikes are actually driving up a key component of the inflation calculation. Mortgage Interest Cost rose at a rate of nearly 30% in May, up about half a percentage point from April. Excluding higher mortgage costs, the inflation rate drops to 2.5%.
A pair of quarterly surveys performed by the Bank of Canada suggest inflation expectations remain elevated and have become somewhat entrenched, which the Bank was hoping to avoid. Both businesses and consumers expect price increases and wage demands to be higher than usual for the foreseeable future.
According to the Bank, several businesses are “planning to make larger and more frequent price increases, in the coming year, than they usually would.” Businesses also think it will take the Bank longer than forecast to tame inflation. More than half do not expect to see the rate back at 2.0% until 2025, at the earliest.
Consumers also expect high inflation to persist. Not surprisingly the survey suggests the cost of living is the top concern for Canadians, with mortgage holders expecting their payments to increase when it comes time to renew.
“Most mortgage holders are confident they will be able to make these higher payments, though doing so will further constrain their discretionary spending,” the report says.
Expectations for wage gains also remain elevated.
Finally, despite the Bank’s efforts to slow the economy, growth remains resilient. While Gross Domestic Product came in flat in April, that is considered a strong performance in light of the impact of the national, federal public service strike that month. The early projections for May show 0.4% growth.
Most market watchers remain confident the Bank of Canada will announce another quarter-point interest rate increase on July 12th.