July CPI increase 'just a taste of things to come,' suggests chief economist
The most difficult phase of the Bank of Canada’s effort to bring inflation back to its target level may be just beginning – and the consumer price index could increase further in the coming months, according to BMO’s chief economist.
Doug Porter (pictured) told Canadian Mortgage Professional in the wake of the central bank’s latest rate announcement on Wednesday that surging energy prices are soon likely to push the overall inflation rate higher, with those costs having already seen significant growth in recent weeks.
“I think this is where the hard work really begins, and it’s certainly not helpful that energy prices have ticked back up in the last couple of months,” Porter said.
“It’s important to stress just how much they’ve moved. They’re now up by about 25% from the lows that they reached just two months ago, and this is going to push up headline inflation.”
How concerned is the Bank of Canada about inflation?
After hitting a 27-month low of 2.8% in June, Canada’s overall inflation rate jumped by more than expected – to 3.3% – in July. That increase was “just a taste of things to come,” according to Porter. “Our view is it’s going to hit close to 4% in the next couple of months, in part because of the rebound of gasoline prices,” he said.
Still, Porter highlighted that the Bank clearly factored in the likelihood of higher short-term inflation in its latest statement, especially as a result of gasoline price growth.
While the central bank may be prepared for that eventuality, there are a few factors it’ll be carefully watching as it decides whether a resumption of rate hikes in October is required – especially the direction of other prices and underlying inflation.
“Clearly, it’s a risk. Even if headline inflation is the only thing moving, if it stays higher than they’re comfortable with, that can bleed into other prices and lead to higher core inflation as well,” Porter said.
“I think that’s the single most important thing to keep an eye on in the next three months: how does underlying CPI do? But more generally, they’ll be looking at the growth backdrop too.”
That’s a reference to GDP (gross domestic product) figures that saw Canada’s economy unexpectedly contract in 2023’s second quarter, shrinking at an annualized rate of 0.2% and likely remaining flat in July.
It would be a “very brave central bank indeed” that would continue raising rates in the midst of declining GDP and a rising unemployment rate, Porter said – meaning that a further rate increase is likely to hinge on a reversal of growth trends and a “disappointment” on the core inflation front.
Bank of Canada maintains policy rate, continues quantitative tighteninghttps://t.co/qJn6I1lnp1#economy #cdnecon
— Bank of Canada (@bankofcanada) September 6, 2023
Were there any surprises in the Bank of Canada’s latest announcement?
The central bank’s September statement was “right down the middle of the plate,” according to Porter, with its decision to hit pause on interest rates having been highly anticipated by markets in light of that underwhelming second-quarter GDP performance.
The Bank remained adamant in its announcement that it would be prepared to hike again despite leaving its policy rate unchanged, using a type of language viewed by some observers as an effort to stave off the sort of housing market uptick that took place after the last time it paused rate hikes in the spring.
“I don’t think the Bank of Canada will ever come out and say they made a mistake – but to me, it was a bit of a miscommunication earlier this year being so clear-cut in the pause language,” Porter said. “It’s interesting that the US Federal Reserve has, I think, learned from that episode and gone out of their way to not talk about a pause – more a skip, definitely leaving the way open for possible moves.
“And I think the Bank has learned its lesson as well. It was very careful not to talk about pausing, or this being the start of a new trend. They definitely leaned on the point that there’s still a tightening bias in place and if there’s any significant disappointment on the inflation front, they’re likely to hike.”
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