Interest rate hikes started in March 2022, and went a lot more aggressive in July 2022. Since then, we have been seeing a turnaround in headline CPI starting June 2022 from lower energy costs. 

And even without energy, CPI finally started to plateau towards Fall of 2022 and then visibly come down starting this year in 2023 – just not enough yet. 

Headline CPI ticked up and went above 3% and if you take out energy, CPI is still much higher at 4.2%.

If you look at the big picture, there’s three components that’s really driving the swings in CPI. We talked about one of them already: energy. Energy contributes to 7% of the basket and typically sees pretty drastic swings. In 2022, YoY energy inflation hit 39% and now we’re down the other way in negative territory. 

Right now, although energy is still down year over year, what we do see is that energy prices have been coming up lately and this is what’s causing the recent uptick in CPI. Either way, the BoC knows there’s significant volatility in energy inflation so this is something that they’re not as concerned about as opposed to the next one: Food.

Food makes up 17% fo the basket, and so even though the swings aren’t as big as energy, smaller moves still have a sizeable impact on the CPI print. What we continue to see is that even though food CPI has come down from 2022 levels, the pace of decline isn’t as fast as what the BoC wants it to be. 

In June, food CPI slowed to 0.1% which is great, but for July, food CPI is back at 0.4% month over month. If you annualize that, that’s a 4.5% CPI which is still probably too high, although we have to say that we are definitely getting closer to target here as well.

Now the biggest contributor to the high CPI number is clearly shelter, which is directly caused by higher interest rates. Shelter makes up 28% of the CPI basket and mortgage interest is showing a 31% annual inflation growth for July. On a monthly basis, there was a  2% uptick for July. So yes, this is a huge reason why our headline CPI is still so high.