Canadian Inflation Shows No Signs Of Abating

General Mark Goode 18 May

 

Inflation at 6.8% is unmitigated bad news. The Bank of Canada looks flat-footed again, having forecast that Inflation would be at least a full percentage point lower by now. What’s worse, inflation looks likely to rise again this month given the surge in gasoline prices from April to May.

Today’s report raises the urgency for policymakers to withdraw stimulus from the economy quickly. Look for another 50 bp rate hike on June 1 and again in July. Markets are pricing in an overnight rate as high as 3% by the end of the year. It is currently at 1%.

In April, Canadian consumer prices rose 6.8% y/y, up slightly from March’s 6.7% pace despite a slowdown in the pace of gasoline inflation. The April inflation rise was driven mainly by food and shelter prices. Excluding gasoline, the CPI rose 5.8% in April, after a 5.5% gain in March. This was the fastest pace since the introduction of the all-items excluding gasoline special aggregate in 1999.

Since late February, Russia’s invasion of Ukraine has boosted energy, commodity, and, most notably, food prices.

The Canadian economy’s strength has added to inflation pressure. The unemployment rate is at a record low. Average hourly wages rose 3.3% y/y last month. With prices rising faster than wages, Canadian families are experiencing reduced purchasing power.

In April, Canadians paid 9.7% more for food purchased from stores compared with April 2021. This rise, which exceeded 5% for the fifth month in a row, was the most significant increase since September 1981.

In April, shelter costs rose 7.4% y/y, the fastest pace since June 1983, following a 6.8% increase in March. Higher prices for energy sources used to heat homes, such as natural gas (+22.2%) and fuel oil and other fuels (+64.4%), contributed to the rise.

Reflecting the dynamic Canadian housing market, homeowners’ replacement cost (+13.0%) is related to the price of new homes and other owned accommodation expenses (+17.2%), which include commissions on the sale of real estate; both rose sharply in April.

The mortgage interest cost Index (+0.2%) increased on a m/m basis for the first time since April 2020.

Rent prices increased in April (+4.5%) compared with the same month in 2021. The rent hike was mostly driven by price increases in Canada’s most populous provinces: Ontario (+5.3%), Quebec (+4.3%) and British Columbia (+6.4%).

While monthly, Inflation slowed in April (0.6%) compared to March (1.4%), the surge in gasoline price in May portends continued high Inflation in next month’s CPI report.

 

Bottom Line

Bloomberg News reported this morning that “The inflation surge has made the Bank of Canada a target of criticism, with some politicians accusing Macklem of moving too slowly. Immediately after the inflation data was published, Conservative leadership candidate Pierre Poilievre released a statement reiterating he plans to fire Macklem should he ever win power.”

The pressure is on for more rate hikes. Central banks all over the world are under similar pressure. Central bank tightening will slow demand, as we have seen already in the Canadian housing data for March and April. It does not address the supply disruptions that are the root cause of much of the inflation pressure.

 

Article Source: drsherrycooper@dominionlending.ca

Canadian Labour Market Tightens As Unemployment Rate Hits New Low

General Mark Goode 9 May

Labour Market Bumps Up Against Capacity Constraints

Job vacancies abound in many sectors, yet employers have trouble finding workers to fill those jobs and retaining workers with so many options available. As the jobless rate falls to new record lows, net new employment has slowed. This is not dissimilar to the housing market, where supply is insufficient to meet demand. Home sales are slowing in response to very low inventories, which are now compounded by rising mortgage rates.

Statistics Canada released the April Labour Force Survey this morning, reporting a slowdown in job gains to 15,300, a mere fraction of the  72,500 jump last month and the whopping 337,000 surge in February.  The April figure was way below the 40,000 rise anticipated by economists.

After reaching a record low of 5.3% in March, the unemployment rate edged down 0.1 percentage points to a series-low of 5.2% last month, compared to the 5.7% level posted before the pandemic. There is considerable excess demand for workers as the economy failed to produce any new growth in labour supply. In April, hours worked declined 1.9%, reflecting a jump in Covid-related absences and disability.

Increases in employment in professional, scientific and technical services and public administration were offset by construction and retail trade declines. These two sectors are reporting significant labour shortages. The federal government hopes to double the housing supply over the next decade, but to do so, homebuilders need many more construction workers.

More people worked in the Atlantic region and Alberta, while employment fell in Quebec. At the national level, employment gains among core-aged women aged 25 to 54 were offset by a decrease among core-age men.

Average hourly wages were up 3.3% (+$0.99 to $31.06) year over year, similar to the growth observed in March (+$1.03; +3.4%). Since consumer prices have risen 6.7% year-over-year, wages are not keeping up with inflation.

Many signs have pointed to an increasingly tight labour market in recent months. In addition to increases in full-time work, one aspect of this tightening has been a decrease in part-time workers reporting that they would prefer full-time employment. The involuntary part-time employment rate fell to 15.7% in April 2022, the lowest level on record. The involuntary part-time rate had been elevated over the first 18 months of the pandemic and peaked at 26.5% in August 2020, as many workers faced challenges securing full-time employment.

There are signs that wage inflation could accelerate in response to continued high job vacancy rates and tightening labour supply.

Bottom Line

Mounting inflation pressure point to another 50 basis point hike in the overnight rate when the Bank of Canada meets again on June 1. Governor Mackem has stated that a full half-point increase will be in play. That will take the policy rate up to 1.5%, compared to 1.75% immediately before the pandemic. The war in Ukraine has exacerbated supply disruptions and markedly increased key commodity prices. Canada’s economy remains strong–the strongest in the G-7–owing to the relatively large commodity sector. Markets expect the overnight rate to hit close to 3% by yearend. However, the Bank will adjust its plans based on incoming data. Preliminary evidence suggests that housing activity weakened in April due to rising mortgage rates and insufficient supply.

Please Note: The source of this article is from SherryCooper.com/category/articles/