Canada June CPI Is Out! Is It Positive Or Negative? (Plus What It Means For Bank Of Canada Next)
Introduction
The June CPI data just came out. This time, how you interpret the data depends on whether you are a glass half full or glass half empty kind of person. Overall, inflation did slow more than expected (a positive) but then food inflation still looks sticky (negative). So in this video, I’ll try to unpack this more. Let’s dive in.
June CPI Review
Here is where we’re at. Economists expected a 3% inflation for June, but headline inflation slowed quicker than expected coming in at 2.8%. We all know the Bank of Canada focuses more on core inflation, and that also is improving, coming in at 3.2% versus the previous reading at 3.7%.
What’s interesting is that instead of showing core inflation excluding food & energy on the Statistics Canada website like every other month, they’ve shifted to show another cut of CPI – CPI excluding only energy this time.
The reality is that food inflation still remains high so looking at CPI excluding energy probably makes more sense nowadays. And what we see here is that there’s still a big four in front, which is further from the target of 2-3%.
Food inflation remains high, but the biggest contributor to a high CPI reading is actually from mortgage interest cost. Shelter makes up almost 30% of the basket and mortgage interest saw an increase of over 30% year over year for June!
The good thing here is we definitely know how to bring this down because mortgage costs are directly correlated to interest rates.
So perhaps another way to look at the data would be to look at CPI excluding mortgage interest as well, and once we do that, the CPI number looks a lot better coming in at 2%! Let’s also take a look at how CPI has been trending.
First off, it looks like mortgage inflation, and energy inflation did a swap before and after rate hikes. Before rate hikes, mortgages were deflationary and now energy is deflationary. The big difference here is that mortgages contribute to a much bigger part of the CPI basket, which is why we’re seeing a much bigger CPI reading today.
The other thing is food inflation is real, and it continues to remains sticky. Energy has been offsetting some of the food inflation but some arguments say that this isn’t going to last when the basement energy effects wear out.
We’re probably going to see CPI above the 3% market starting the fall unless food inflation comes back down. In other words, we should basically all be focusing our attention on food inflation nowadays.
Now if we look more closely at food inflation month over month, it could be slowing. But there’s only one month of data right now, so it’s way too early to tell for us and the market seems to feel the same way.
BoC Rate Projections
Despite a better than expected CPI reading, bond yields barely fell so the market view hasn’t changed much at this point.
There’s another set of data coming out next month on August 15 before next meeting on September 6, so we expect the markets to probably remain quiet until then.
The big banks are more or less on the same page. TD and BMO see some positive news based on the data, but they’re generally still waiting on August data before giving more insights on where they think rates will go. On the other hand, RBC thinks rates will hold from this point on and CIBC even sees an overshot of rates at this point.
Core metrics still remain sticky so we’re not ruling out another rate hike. Either way, we’re definitely closer to the end of the rate hike cycle now. We do think that either way, the BoC will continue to maintain their verbal hawkish stance and maintain the view that rates need to stay higher for longer to bring inflation down for good.
What's Going On With Toronto Real Estate?
We’re actually also seeing a lot more divide on the real estate side too.
Many existing home owners are definitely feeling more pain as time goes by, and more are actively looking for ways to improve their holding power or sell.
Most buyers who need to borrow more money to aren’t in a hurry to buy anymore and are generally less able to buy at the same prices from spring because of higher borrowing costs.
However, a smaller group of investors who are cash rich are actively looking to snip up deals – in the long run there is still good long term growth for Toronto real estate and this is the perfect environment to get in with deep discounts over the next few months in this bearish real estate market.
How We Can Help
Now no matter where you stand in this real estate equation, we’re here for you.
We’re a real estate sales brokerage focused on real estate investing in Toronto – whether you’re looking to buy, sell or need help to review your existing situation, we can help. Just book a free discovery call with us!
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