CIBC's Tal weighs in on the outlook for yearly price growth
The Bank of Canada appears to be slowly but surely winning its war on inflation if monthly changes to the consumer price index (CPI) are anything to go by.
After spiking to a 39-year peak of 8.1% last June, the measure – which records price changes over time – has ticked steadily downwards, coming in at a March rate of 4.3%.
That monthly progress is one of the key reasons the central bank has opted to hold its benchmark interest rate steady in its last two decisions after a spate of aggressive hikes over the previous 12 months.
Still, the Bank is unlikely to rest on its laurels where inflation is concerned, according to a prominent economist, with it and other central banks prepared to bring down annual price growth at all costs.
Speaking on a recent virtual panel discussion hosted by Neighbourhood Holdings, CIBC deputy chief economist Benjamin Tal (pictured top) indicated that while a so-called “soft landing” for the economy was the preferred option for those actors, they would be prepared to accept a downturn if required.
“The Bank of Canada, the Fed, the ECB [European Central Bank], they have established a reputation as inflation fighters – they’re not going to toss it away,” he said. “They will do whatever it takes to make sure that inflation is back to 2%, even if it means taking this economy into recession.”
The summary of deliberations for our April 12 interest rate decision is now available.
— Bank of Canada (@bankofcanada) April 26, 2023
Read how the decision was made: https://t.co/puPN9GbIV8#transparency #cdnecon #economy pic.twitter.com/jrbWtyz8eO
What’s impacting Canada’s current inflation figures?
Food and energy prices – two of the five main components of inflation alongside supply chain, rent and wages – are still increasing on a yearly basis, but at a slower clip than last year when they skyrocketed in the wake of Russia’s invasion of Ukraine.
That deceleration has been a “major force” behind the overall decline in inflation, according to Tal, who also welcomed improving supply chain conditions as a positive sign. In March, the Federal Reserve Bank of New York indicated that global supply chains had returned to normal after nearly three years of snarls caused in large part by the COVID-19 pandemic.
“The supply chain index by the New York Fed is basically back to normal. Shipping costs are down dramatically, and shipping activity back to normal today in the US,” Tal said. “You have 20% more truck drivers than before the crisis – so this is going down.
“Why is it important from your perspective? Because if all the inflation that we’re seeing is coming from supply, then there is nothing the Bank of Canada can do about it, because supply means outside the country… the Bank of Canada, the Fed, can take interest rates to the sky [but] that will do nothing if all the inflation is coming from outside the country.”
The national annual rate of inflation mainly coming from Canadian sources is a good sign, Tal added, because those domestic sources are generally more responsive to higher interest rates than external ones. “The Bank of Canada is empowered by this trend, and makes it more effective,” he explained.
Another encouraging indicator where inflation is concerned: the fact that retailers’ profit margins are slowly being punctured, with those figures having skyrocketed during the pandemic thanks partly – but not entirely – to supply chain difficulties.
“I suggest that during COVID, many retailers were hiding behind the fog of supply chain… We have seen a significant increase in profit margins,” Tal said. “Now with supply chain going back to normal, you cannot hide behind that anymore. So margins are going down. That’s a major disinflationary force that we are seeing.”
Is the inflation rate closer than we think to the Bank of Canada’s 2% target?
One of the more striking takeaways from Canada’s latest inflation figures was that mortgage interest payments have surged year over year, jumping by 26.4% in March.
While those contributed strongly to March’s annual rate, Tal said they were an inevitable product of the Bank of Canada’s rate hikes, with those two competing forces – one inflationary, the other aimed at curbing price growth – the equivalent of “putting a humidifier and dehumidifier in the same room and letting them go at each other.
“And that’s why we all know that higher interest payments on mortgages [are] actually disinflationary – therefore, you have to take it out of the calculation,” he added.
When that’s done, Canada’s inflation rate is already at or close to the central bank’s target rate, Tal said, even if it expects the overall rate to fall only to 3% by the middle of this year and 2% by the end of 2024.
“You do that [take higher mortgage interest payments out of the equation], and we are already at 2%,” he said. “That’s why the Bank of Canada is telling you, ‘We are basically done.’”
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