(Ottawa) Statistics Canada will release its Consumer Price Index (CPI) report for January on Tuesday and forecasters expect a decline in the inflation rate in Canada.
Banks RBC, CIBC and TD all expect last month’s annual rate to fall to 3.2%, down from 3.4% in December.
Nathan Janzan, RBC’s deputy chief economist, says the slowdown is likely due to energy and food prices. “Gasoline prices were lower than a year ago in January and food price growth likely continued to slow year over year,” in his opinion. “I think there will be more focus on the other components of the CPI, watching for signs that broader inflationary pressures continue to slow, if only at a gradual pace. »
As high borrowing costs prompt consumers and businesses to cut spending, inflation is expected to slowly approach the 2% target by the end of the year. But unlike what usually happens when interest rates rise, the housing market won’t help slow the economy.
Most economists expect housing costs to continue to skyrocket this year, making the Bank of Canada’s task even more difficult.
“Food and housing remain the thorn in the side of the Bank of Canada,” according to James Orlando, director of economic affairs at TD Financial Group.
In December, housing costs increased 6% from a year earlier and grocery prices rose 4.7% year-over-year. James Orlando argues that the central bank should not wait to cut interest rates in the hope that the housing market will slow down, since high interest rates will not help reduce these costs.
In a report released Friday, CIBC also noted that the central bank was not in a good position to help reduce housing costs. “Planned reductions in the influx of international students, and perhaps other future government measures, could be more effective than high interest rates in calming rising rents,” the report said.
The Bank of Canada recently highlighted the outsized role housing has played in supporting inflation. In last month’s policy rate announcement, when it chose to keep it at 5%, the central bank noted that housing costs were now the main driver of above-target inflation.
RBC says mortgage interest costs – which are driven by central bank rate hikes – account for a quarter of inflation. If these costs were removed, the bank says inflation would be within the target range of 1% to 3%.
The Canadian Real Estate Association recently announced a recovery in home sales in January for a second consecutive month. Prices fell and there was an increase in activity.
Moreover, the prospect of a rebound is clearly on the mind of the Bank of Canada. In her explanation for keeping the key rate on Jan. 24, she signaled that her governing council was concerned that a rebound in the housing market this spring could keep inflation above its target, even if price growth elsewhere in the economy is slowing down.
James Orlando warns that if the central bank were to cut rates too soon, it could cause further turmoil in the property market. But he added that the Bank of Canada should continue to focus on how the economy is doing as a whole. “Are you willing to sacrifice the rest of the economy to bring down housing inflation? Our analysis shows that you won’t even be able to bring down housing inflation no matter what you do with interest rates,” he says.
To achieve 2% inflation, James Orlando believes that prices of other goods and services would essentially have to stop rising to offset high housing costs.
In a speech delivered on February 6 in Montreal, the governor of the Bank of Canada, Tiff Macklem, recognized that the central bank could not do much about housing costs. “Housing supply has remained below demand for many years. There are many reasons for this: zoning restrictions, delays and uncertainties in approval processes, and a shortage of qualified workers. None of these problems can be solved by monetary policy,” he said.