Hannah Betel June 27, 2019 No Comments

Canada is an expensive place to live in. With a generally high quality of life comes high taxes, prices, and fees. Canadians pay some of the highest airfare, phone bills, and property taxes in the world. They also pay huge sums for modest real estate, as well all know all too well. Last month, inflation in Canada hit 2.4%, driven by a surge in food prices. Fresh vegetables and meat along with new car prices rose significantly. The only commodity that saw prices fall was gasoline, which recorded a 3.7% decline. Without the fall in energy prices, the inflation rate would have been 2.7%.

There are different definitions of inflation in the economics community. Some economists hold the view that inflation is solely an increase in prices. Others believe that inflation is almost always a direct result of an increase in the money supply driving up prices, more money in circulation means higher prices. In Canada, inflation monitoring, data collection, and targeting is sophisticated and well regarded internationally. The BOC has an inflation target rate of 2%, and is zealous is maintaining this rate. 

What last month’s figures mean is more difficulty for the central bank. On the one hand, economic growth is very modest and pressure to reduce rates to spur demand and lower housing costs is strong. On the other hand, the BOC is mindful of high debt, the need for a normalized rate environment, and now a growing trend of incrementally rising inflation. An interest rate rise now to blunt the modest increases in inflation we are seeing and would honour the BOC’s commitments to 2% inflation, but it would dampen the economy and irritate a number of sectors in need of debt. An election year makes the BOC’s task harder still.

Tembo’s read on all of this is that inflation rising will lower the possibility of a market favoured rate cut. If it continues to build up past 3% expect a rate hike unless the Fed gives in to growing pressures to reduce rates. 

Leave a Reply

Your email address will not be published. Required fields are marked *