By Tom Czitron
Canada’s annual inflation rate rose to 3.3 percent in July, up from 2.8 percent in June, according to Statistics Canada on Aug. 15. The Consumer Price Index was predicted to rise to 3.0 percent due to the steep drop in gasoline prices in July 2022.
Gasoline is up 12.9 percent year-over-year compared to 21.6 percent in June. The 2.8 percent annualized rate turned out to be only temporary, as the May year-over-year rate was 3.4 percent. The core CPI rose 3.8 percent year-over-year.
Food-price inflation remains a serious problem for Canadians. Grocery prices were up 8.5 percent in July, year-over-year. Although this is down from 9.1 percent in June, the rate of improvement has been slower than hoped for and remains a serious personal issue for Canadian families and increasingly, a political problem for the federal government.
Recent opinions polls have pointed to a collapse in support for the Liberal Party. Oddsmakers currently put the Liberals’ probability of being elected at only about 10 percent. The response has been optimistic posts on social media by the prime minister and senior officials, and personal attacks on Conservative Leader Pierre Poilievre in the mainstream media and on X, formerly Twitter.
The Bank of Canada’s preferred core figures remain between 3.6 percent and 3.7 percent. The monthly number of 0.3 percent in July is evidence that inflation remains well above the bank’s specific target of 2 percent, and within a 1 percent to 3 percent range.
Any hope that the Bank of Canada will cuts rates soon have been abandoned by market watchers. At this point, it would take a surprising and devastating economic collapse to precipitate rate cuts by the bank before the end of 2023. This is bad news for homeowners whose mortgages will be up for renegotiating in the next six months, and will put more pressure on an already anemic economy, as consumers are forced to cut back to pay their mortgage while food prices remain high and continue to increase.
Ten-year Canada yields fell after the release of the data, after rising by about 25 basis points in one week. Ten-year yields were about 3.4 percent when the June CPI number was released, and were about 3.75 percent after the Aug. 15 release. Although one might assume the CPI number would have been bad for the bond market, we were probably oversold, and the U.S. market improved slightly. One-year yields rose about six basis points to 5.3 percent.
The sell-off in the bond market continues. The Canadian dollar was largely unchanged after losing almost 3 percent in value relative to the U.S. dollar, as the 10-year spread between U.S. Treasury bonds and those of the Canadian government rose to 43 basis points from 33.
There was a general consensus that the Bank of Canada would not raise rates at the next policy meeting on Sept. 6, but market watchers are less sure of this view now. The Canadian economy has been anemic as annual growth is expected to be 1.8 percent in 2023 and 1.2 percent in 2024, according to the central bank. China, the world’s second-largest economy, is enduring deflation right now and a precipitous fall in both exports and imports. U.S. retail sales, also released Aug. 15, surprised to the upside, increasing by 0.7 percent from June to July.
Inflationary pressures continue, and yet the world economy remains weak. Central bankers and governments are in a conundrum of their own making. The old adage, “You broke it, you fix it,” assumes the people whose policies weakened the economy have the ability to repair their mess.