David Rosenberg: Bank of Canada has nothing to fret about despite CPI hysteria

The story beneath the surface still remains one of acute disinflation

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The bond bulls and Bank of Canada policy doves were on the receiving end of a splash of water this past week. The consumer price index doubled consensus expectations in May, coming in at 0.6 per cent (not seasonally adjusted). That, in turn, pushed the year-over-year trend back up to 2.9 per cent from 2.7 per cent in April (consensus here was looking for further deceleration to 2.6 per cent).

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The month-over-month move in seasonally adjusted terms was less scary at 0.3 per cent, but that is still the highest print for the year to date. It was also a setback to see a 0.4 per cent in the old way we used to assess the core CPI in Canada (stripping out food and energy), which ended five months of benign readings and is the highest print since September 2022.

The core median inflation rate also hooked back up to 2.8 per cent from 2.6 per cent, while the core trim measure ticked higher to 2.9 per cent from 2.8 per cent (both were up 0.3 per cent on a month-over-month basis).

Rate cut doubts

This adds some doubt as to whether the Bank of Canada will pull the trigger again at the next meeting on July 24. There is another CPI report yet to come (on July 16) before that meeting, and we still feel that the central bank should cut again, given the fact that the economy is in excess supply, which means the pressures on inflation going forward will be down, not up. The CPI data just goes to show that nothing moves in a perfectly straight line.

That said, there were some encouraging signposts. The common core inflation rate slowed for the ninth month in a row — to 2.4 per cent year over year from 2.6 per cent in April, 5.2 per cent a year ago and the lowest since April 2021. This is a key metric because this measure of inflation screens out the noise across components in these monthly price reports.

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The CPIX measure, which excludes the eight most volatile components, did rise an outsized 0.3 per cent month over month, but, to be frank, this comes on the heels of five flattish reports and the year-over-year trend at 1.8 per cent (was 1.7 per cent in April) compares to 3.6 per cent a year ago and 6.1 per cent two years back. In other words, the fundamental downward trendline remains intact.

No sticky inflation

Let’s also remember that shelter commands a dominant 29 per cent share of the CPI, and this area spiked 0.4 per cent month over month and is up 6.4 per cent on a year-over-year basis. Mortgage interest is up 23 per cent year over year, and property taxes are pressing against five per cent, which is the fastest pace in more than 30 years.

Home insurance has also jumped 9.3 per cent year over year, one of the highest rates of increase over the past two decades. From our perspective, debt-service costs, insurance premiums and property taxes act as more of a drag on real household purchasing power than a true source of inflation, but these are included in the data series.

The bigger picture is that for ex-shelter costs, inflation is running at 1.5 per cent year over year and that has basically been the case all year long — it was 2.8 per cent this time in 2023 and 7.8 per cent in May 2022. Not to mention that it’s below the 2.1 per cent year-over-year trend just prior to the pandemic breakout in early 2020 (when the policy rate was 1.75 per cent, not 4.75 per cent).

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There is something that must be understood, and it just doesn’t concern the Bank of Canada, but all central banks. There are some prices (health, education, various measures of shelter, property taxes and insurance) that authorities really have little or no control over. In the Canadian context, the year-over-year trends across a gamut of items that actually move with the economic cycle are either deflating or close to flattening out: recreation: 1.3 per cent; motor vehicles: 0.7 per cent; housing maintenance/repairs: 0.7 per cent; housing replacement costs: minus 0.8 per cent; furniture: minus 1.9 per cent; household operations: minus two per cent; appliances: minus 2.5 per cent; and clothing: minus three per cent.

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As we do for the United States, we constructed a “cyclical” CPI series for Canada, and it came out flat sequentially in each of the past two months. Indeed, the year-over-year trend is now running fractionally negative. That compares to 2.1 per cent a year ago and 6.3 per cent two years back.

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So, one, there is nothing at all “sticky” here, and, two, the Bank of Canada has nothing to fret about, despite the hysteria among most Bay Street economists in the aftermath of the CPI data. The story beneath the surface remains one of acute disinflation.

David Rosenberg is founder and president of independent research firm Rosenberg Research & Associates Inc. To receive more of David Rosenberg’s insights and analysis, you can sign up for a complimentary, one-month trial on the Rosenberg Research website.

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