Is the worst of inflation really behind us, as Finance Minister Eric Girard said last week?
I ardently want to believe it, knowing the impact of this inflation on the budget of families, workers and retirees. And knowing that persistent inflation would force the Bank of Canada to raise interest rates even further, with its painful effects on the economy.
However, on closer inspection, it appears that the minister is right: recent price increases have been much lower than those of last spring, and much lower than the official annual rate for the month of October, of 6 .9%.
Be careful, the salmon fillet will not necessarily cost $22 per kilo. Nor will gas soon drop to $1.20 per liter or 5 ½ accommodation in Montreal to $1,100 per month.
The prices of products and services remain relatively high, but it is their upward pace that is slowing down. The recent annual rate of increase is even close to 3-4%, far from the 7-8% of recent months.
It was the excellent economics department of the National Bank that enlightened me on this subject. Essentially, we should know, prices exploded between February and July, under the effect of the war in Ukraine, which added to the impact of the confinement in China on supply chains and the strong demand. local post-pandemic.
But since July, the pace of price acceleration has fallen back to more “normal” levels. To find out, the National Bank not only compares the prices of the last month with those of the same month of last year, but also with those of three months ago. This growth over three months is reduced to an annual rate, in order to make it comparable.
Last May, therefore, the annual rate of price growth had exploded by 12.5% for this indicator over three months. Since then, the pace has gradually declined to 2.4% in September, the lowest rate in two years, before rising to 4.3% in October, due to the price of gasoline. In short, recent developments are very encouraging.
That’s not all. The National Bank also tracks another indicator, which is interesting because it is less volatile than the global Consumer Price Index (CPI). This indicator is the evolution of the median of this CPI, which is based on a basket of 55 products and services1.
However, in October, this median CPI grew at a rate of 4.8%, much less than the growth of the overall CPI, of 6.9%. And again, the more recent trend (over 3 months) of this median deflates the annual rate of price growth to 3.3%. Hallelujah!
Obviously, the Bank of Canada’s interest rate increases, which began in March, are beginning to bear fruit. “We are approaching the end of rate hikes. We expect another jump of 50 basis points in early December, but after that, we expect there will be a break,” Matthieu Arseneau, deputy chief economist at the National Bank, told me.
Interest rates could even take a downward slope from the 2e half of 2023, estimates the economist, when inflation has been brought under control. Phew!
Mastered, really? Well ! there you have it, the 12-month price growth pace will remain weighty until May 2023, i.e. until the comparison is made with the strong rising months of 2022. After this period, the pace will slow down, for a purely technical.
Added to this phenomenon is good news coming from the supply chain, among others.
“Abundant upstream inventories, sharp declines in freight transportation costs, price cuts from Chinese producers and a slowing global economy point to a lull in commodity price inflation,” the report wrote. National Bank in its November 18 analysis.
“On the services side, the analysis adds, the return to more acceptable levels of inflation could be slower, but there are reasons to believe that the labor market will ease in a context of weak growth, contributing reduced upward pressure on wages. »
If the trend continues, therefore, the National Bank estimates that price growth will even fall to 1.9% in the 4e quarter of 2023 (compared to the 4e quarter of 2022). The median of economists surveyed by the Bloomberg agency is 2.4% and the Bank of Canada, for its part, judges that the same rate will be closer to 2.8%.
In short, almost all economists predict that we will be back to the range required by the Bank of Canada by the end of 2023, namely an inflation rate of 1 to 3%.
Let’s cross our fingers so that other elements do not unduly harm this trend or better, that other factors come to help, such as a possible peace process in Ukraine.
1. Or more precisely, “the price change at 50e percentile of the distribution of price changes during a given month, weighted according to the weights of the components of the CPI basket”, as defined by the Bank of Canada.