Commentary
Canada’s Consumer Price Index rose to 4 percent annualized to the end of August from 3.3 percent in July. This figure is far above the June number of 2.8 percent.
Inflation may not be accelerating as much as these figures would indicate, but price pressures remain sticky despite government assurances that we would be returning to the under 2 percent target. The June figure of 2.8 percent, in retrospect, was met with deserved incredulity. The CPI was expected to rise to 3.8 percent but the market was still surprised. The Government of Canada 10-year yield initially rose about 10 basis points, getting close to 3.9 percent.
Food inflation remains a serious issue for average Canadians. However, grocery prices fell 4 percent in August. The annual grocery component of CPI was 6.9 percent in August compared to 8.5 percent in July. I suspect most food shoppers might dispute this figure.
Canadians also appear to be leaving high-end food markets, to an extent, in favour of cheaper alternatives. Dollarama’s stock price is up about 25 percent as people try to stretch their incomes that, for most, are lagging the increase in the cost of living.
The federal government has been under pressure to alleviate Canada’s current economic difficulties. They realize this as the Liberal Party has plummeted in the polls. Their apparent solution was to engage in Kabuki theatre and call senior executives of grocery chains into a meeting with federal officials and threaten them with new taxes. Of course, anyone with a high school senior’s understanding of economics and accounting realizes that grocery executives do not print money, nor do they have any control over most input prices. Frankly, a tax on grocery chains is either an empty threat to placate voters or yet another tax grab. Any taxes would be passed on to the consumer and worsen the present situation.
Mortgage costs rose 2.7 percent over the month of August and a mind-numbing 30.9 percent year over year. Eventually, this will have a serious effect on the economy as homeowners with mortgages have considerably less to spend. Banks have allowed many mortgagors to defer principal payments and even accrue interest, thus lengthening their amortizations, in some cases well beyond their life expectancies.
This is not sustainable in the long run and weakens the balance sheets of the banks in real terms. A mortgage is like a bond, and when the borrower cannot pay their obligations in a timely manner, that instrument declines in value. Fortunately, banks do not have to mark mortgages in arrears to market, but this practice still pinches interest earnings. This practice is also keeping home prices artificially high because people are not being forced to sell.
Rent was up 7 percent in August and 6.5 percent annually. This figure is high and is an estimate, but it does contradict the narrative in some of the media that rents are soaring to unlivable levels. Yes, there are anecdotal examples of renters being hit with astronomical increases by landlords, but the issue is not widespread. Given the lack of housing, one might expect that rents would have increased by much more, in aggregate, but the rental market is highly regulated.
The issue in Canada remains supply, and this will only be addressed when apartment builders are allowed to build at a profit. Do not bet on that happening anytime soon. A massive government-sponsored and subsidized push would only make things worse, especially in the long term.
Oil prices are soaring, and this will further put pressure on consumers and businesses. Any taxes, such as the carbon tax, will put more pressure on prices and create more hardship. It will do nothing to alleviate climate change but it will fill government coffers and help Ottawa offer more hand-outs for the next election. However, the negative effect of increased taxes will result in a weaker economy and therefore require more social-program spending and lower overall tax revenues.
There are few things that are consensus among serious economists and analysts, but one is that increasing taxes during an economic downturn is a very bad idea. We learned, or should have learned, this lesson after the Great Depression. During the Reagan years, tax rates were reduced, and the economy thrived.
The new CPI figure increases the probability that the Bank of Canada will continue to increase rates, although we still may have peaked. More crucially, with inflation stuck between 3 percent and 5 percent, rates will not be cut anytime soon.
The Canadian and global economies are slowing demonstrably, which should alleviate some prices pressures. However, we may have to continue to put up with higher inflation for longer than officials assured us. The 3 percent to 5 percent range may be here for years. In the 1980s and early 1990s, inflation hovered around 4 percent and people coped very well, having got used to the previous 6 percent to 12 percent range of the 1970s.
Governments that let the inflation genie out of the bottle may not be in a position right now to reduce inflation below 2 percent without dire consequences for the economy. Things might look bad now, but they could get worse.
