Tembo Financial May 25, 2021 No Comments

The latest Canadian inflation figures are out and are the highest in a decade at 3.4%. Similar data release in the U.S. shows inflation rising above 4%. The increase in April set a new pandemic-era high for the third time in as many months and was the highest reading since May 2011, when the consumer price index posted a year-over-year gain of 3.7 per cent. Gasoline prices in April were up 62.5 per cent on a year-over-year basis, the largest annual increase on record as prices at the pumps rebounded from an 11-year low in April 2020. The consensus, for now, is that this inflation is temporary, and that it will subside – but this remains to be seen. If more people start going back to work and if the economy re-opens, that could open up a flood of activity that will exacerbate inflation – we will see.

In response to this, BOC Governor Macklem had the following to say: “There are far too many Canadians unemployed, and that is putting downward pressure on inflation. So, yes, we expect it to go up to around three (per cent) and then diminish thereafter.” But Macklem also warned that rates will have to go up eventually, a big change of tune from a couple of months ago – when the BOC said that low rates would remain for years to come. Here’s what he said on rates: “Interest rates have been very low, and at some point they are going to go back up.” South of the border in the U.S., where money printing has been more intense and inflation spikes more poignant, banks are raising red flags on the long term stability of the U.S. dollar.

At the same time, the BOC is voicing more anxiety over the quality of mortgage debt that has been issued over the pandemic: “The quality of new mortgage borrowing deteriorated during the pandemic. The share of newly issued mortgages with a loan-to-income (LTI) ratio above 450 per cent rose substantially in the second half of 2020.” But at the same time, the BOC is again pointing to the importance of higher real estate prices: “”If house prices and household incomes were to fall in the future because of a shock to the economy, some households could need to cut back on spending. This would slow the economy and possibly put stress on the financial system.”

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