Bank of Canada hike not done deal despite inflation ‘head fake’

Article content

Article content

Good morning,

We were warned that the battle against inflation would get rough, but nonetheless, this week’s numbers were a gut punch for Canadians looking for interest-rate relief.

“There’s no sense sugar coating this one — it is not a good report for the Bank of Canada,” BMO chief economist Douglas Porter wrote after the data came out.

Consumer prices rose 0.6 per cent in July, pushing the headline rate to 3.3 per cent, a big comedown from June when the reading (2.8 per cent) fell into the Bank of Canada’s target range for the first time in more than two years.

Article content

While a modest uptick had been expected, Tuesday’s data “blew the doors off economists’ forecasts,” said Randall Bartlett, senior director of Canadian economics at Desjardins.

It also pushed Canada’s inflation higher than the United States for the first time since before the pandemic.

How did this happen?

A couple of “idiosyncratic factors” drove the gain, including a spike in Alberta electricity prices and higher airfares and travel services, said Bartlett in a note entitled “CPI head fake masks cooling under the hood.” Gas prices played a role as they fell less on a year-over-year basis than they did in June.

However, Bartlett argues that key measures that the Bank of Canada looks at showed signs of improvement. The Bank’s preferred CPI median and trimmed mean slowed slightly and its newest measure of core inflation which excludes shelter fell to 4.2 per cent annualized from 4.6 per cent in June.

“The modest slowing core CPI is a thin silver lining for policy makers in an otherwise strong CPI report,” said BMO’s Porter.

BMO economists like Desjardins’ believe the Bank of Canada would prefer to hold rates next month given that other data suggest the economy is cooling.

Article content

Article content

But “the inflation figures will make it a tougher call,” Porter said.

One of the main reasons the Bank began hiking again at the beginning of the summer was because of a bump-up in April’s inflation, he points out.

While the majority of economists expect the central bank to hold at 5 per cent next month, there are some in the hike camp. CIBC economists see a final 25-basis-point increase in September as likely.

Derek Holt, head of Scotiabank Capital Markets Economics, warns that the Bank of Canada is at “high risk of losing the fight” and needs to crush inflation with more rate hikes.

“If the BoC waits for the lagged effects, then it faces the high risk of losing as wages and expectations get out of hand,” he wrote in a note on the data.

For now economists will watch for the next piece in the puzzle. The reading on second-quarter gross domestic product comes out Sept. 1, giving the central bank something else to ponder before its decision Sept. 6.

__________________________________________________

Was this newsletter forwarded to you? Sign up here to get it delivered to your inbox.
_____________________________________________________________________

Article content

America is where the money is, according to this chart from Credit Suisse AG’s annual global wealth report, that came out this week. The United States accounted for 38 per cent of the 59.4 million millionaires in the world at the end of 2022, more than any other country on earth. Mainland China is home to 11 per cent of them and Canada, three per cent.

Global wealth took a tumble last year for the first time since the 2008 financial crisis, cutting the number of millionaires in the world by 3.5 million, says the report. The U.S. lost 1.8 million millionaires and Canada lost 299,000.

_______________________________________________________

If your mortgage is coming up for renewal, you are probably nervous about what today’s rates mean for your payment. Every per cent interest rates go up can mean hundreds, if not thousands, of dollars a month in your bottom line.

Article content

Depending on how tight your budget is, an extra few hundred dollars can make a big impact. Our content partner MoneyWise has four tips that could potentially save you money.

____________________________________________________

Today’s Posthaste was written by Pamela Heaven, @pamheaven, with additional reporting from The Canadian Press, Thomson Reuters and Bloomberg.

Have a story idea, pitch, embargoed report, or a suggestion for this newsletter? Email us at posthaste@postmedia.com, or hit reply to send us a note.

Article content