Inflation is approaching its peak

Inflation rose to 8.1% in June, a level not seen since January 1983, when the song Maneater of Hall & Oats was playing on the radio in a loop, to recall the economists of Desjardins.

Andre Dubuc
The Press

But, for the first time in eight months, the change in the Consumer Price Index (CPI) was lower than expected, which was 8.4% over one year.

Compared to May, inflation is up 0.7%, according to Statistics Canada figures, compared to forecasts of 0.9%.

Gasoline contributed powerfully to this new high. On the other hand, the price per liter is down 13% in July, according to the National Bank, which suggests a certain lull next month.

Far from being limited to energy, price increases remain widespread. “Prices in Canada remain far too high, and 45% of the CPI basket is now experiencing an increase of more than 7% per year,” notes Desjardins Group.

Moreover, core inflation, without its more volatile elements, remains strong to the taste of TD Bank economists. “The high level of core inflation, in particular, will be a source of concern and given the extent of the price pressures, we believe that the long-term inflation forecast will remain under pressure. The debate for September should be between interest rate moves of 50 and 75 points, and a hike of less than 50 points would be unacceptably timid,” writes the team led by Andrew Kelvin, chief strategist in Canada.

In detail, automobiles, hotels and mortgage costs all fueled inflation in June. “Mortgage interest costs rose 1.4% in June, the largest monthly increase since September 1982,” said Karyne Charbonneau, an economist at CIBC, who also mentions a possible ceiling on inflation.

Rate hikes are already being felt

The rate hikes recently decreed by the Bank of Canada have started to have an impact on the housing market. “Real estate prices have moved from a strong headwind to a headwind for price growth,” argue Nathan Janzen and Claire Fan of the Royal Bank of Canada’s economics department.

Still on the side of good news, the variation in food prices stagnated last month, while remaining at a high level.

Furthermore, household purchasing power continues to deteriorate, with prices rising faster than the average hourly wage. It rose 5.2% in the 12 months to June, Statistics Canada found. “Hiring intentions that are still strong in a tight labor market reflect far too strong domestic demand,” indicate Matthieu Arseneau and Alexandra Ducharme, economists at the National Bank.

The institution is therefore leaning towards another increase in the key rate by 75 basis points in September by the Bank of Canada, which will take it to a 15-year high. Then the Bank will rest and contemplate the effects of its work on the economy, she suggests.

On the financial markets

Treasury yields fell slightly on the release of weaker than expected data. Thus, the yield on 10-year Canada bonds fell 5 basis points around 8:30 a.m. Wednesday to flirt with the 3% line. It then rose to stand at 3.12% around 3 p.m.

According to TD Bank, “Canada’s bonds are to be expected to maintain [leur] downward trend compared to that of the United States.

Since the end of June, the spread between Canada 10-year bonds and US bonds of the same maturity has been narrowing. It is currently around 12 basis points.

For its part, the Canadian dollar remained unmoved, selling at US$0.77. The S&P/TSX index ended the day very slightly up 82.96 points, at 19,020 points.