(OTTAWA) As annual inflation nears 3%, economists are warning that steady monthly declines in price growth will stagnate — and even potentially reverse in the second half of the year.
Statistics Canada is due to release its consumer price index report for June next week, and forecasters predict that annual inflation will have slowed from its 3.4% level in May.
“We expect a deceleration to 3.0% year over year. And that’s really mainly because the gas prices we’re paying today are compared to the highs we saw last year,” said Andrew Grantham, Managing Director and Senior Economist at CIBC.
But inflation is not expected to slow much further this year, making the return to the 2.0% target long and tumultuous.
According to the Desjardins Group’s chief economist, Jimmy Jean, the next report on the consumer price index will mark a turning point in the fight against inflation.
The rapid deceleration in inflation since last summer is largely explained by the year-on-year effect, which refers to the impact of price movements from a year ago on the calculation of annual inflation. .
In simple terms, this means that prices did not rise as quickly this year because they were compared to already high prices a year earlier.
On Wednesday, the Bank of Canada raised its key rate by a quarter of a percentage point in part because it expects inflation to remain elevated longer than expected.
The central bank has released new projections that suggest inflation will return to its 2.0% target around mid-2025, about six months later than it had previously forecast.
The central bank explained that the upward revision to its inflation forecast was due to “excess demand” in the economy, and higher-than-expected price increases in goods and housing markets.
The Bank of Canada’s key interest rate is now at 5%, and the bank is not ruling out further rate hikes if needed.
Grantham says CIBC’s inflation forecast for the coming months is in line with that of the Bank of Canada and warns that inflation could even rise in some months.
This led the central bank to hike rates, even as inflation appears to be slowing, at first glance.
“Where our forecast differs most from that of the Bank of Canada is in what happens next,” Grantham said.
“We actually believe that inflation will return to 2.0% by the second half of next year. »
The economist explains his forecast with some signs of a slowing economy, as well as further improvements in supply chains.
The Canadian labor market has begun to ease as the unemployment rate rises and wage growth slows. And Statistics Canada data shows that the household savings rate is falling.
Part of the Bank of Canada’s hawkish stance, however, appears to be attributable to the housing market, which has rebounded this year despite high interest rates.
“Activity in the housing market has firmed up a bit. Residential construction and listings are lagging behind demand, putting further pressure on prices,” the Bank of Canada said in a news release announcing its latest rate hike.
Mr. Jean pointed out that the last two rate hikes are changing sentiment in many housing markets, although rapid population growth is dampening the effect of interest rate hikes on housing demand.
In May, Statistics Canada’s mortgage interest cost index jumped 29.9%, its fastest rise on record.
Ironically, mortgage interest charges drive up inflation.
Excluding mortgage interest charges, prices actually rose only 2.5% year over year in May, well within the Bank of Canada’s target range. Canada.
Mr. Grantham points out that some of the main measures of inflation that the Bank of Canada examines exclude these costs, which he says makes sense.
“Every time you raise interest rates, if everything else remained equal, inflation would actually accelerate,” Grantham noted.
“So it doesn’t necessarily make much sense, from an inflation-targeting central bank perspective, to include those costs. »
