Statistics Canada announced that Canada’s inflation rate slowed to 3.1% in October, that’s down significantly from the 3.8% reading in September. There is a caveat to that drop in inflation, however. The big deceleration was mainly a result of lower gas prices, which were down 6.4% over September and down 7.8% from where gas prices were a year ago.
Excluding gas, Canada’s inflation rate would have been 3.6% in October. That’s down slightly from the 3.7% non-gas inflation rate from September. Food prices also fell for the fourth month in a row but were still up 5.4% on an annual basis.
It might be tough for Canadians to see the silver lining since food prices are still up more than 20% from where they were three years ago. That’s the biggest increase in 40 years.
One big area that is eating up a large portion of Canada’s budget is housing. The typical price of rent jumped 8.2% over the past year—more than double the current inflation rate. That’s also up from 7.3% in September.
For homeowners, the data is just as dismal. Mortgage interest costs are up by more than 30% over the last year with property taxes up 4.9%. That represents the largest one-year increase in property taxes dating back to 1992. If you stripped mortgage costs out of the equation, Canada’s inflation rate would be just 2.2%. Remove the cost of shelter altogether and inflation would be 1.9%, which is below the Bank of Canada’s 2% target.
Higher mortgage payments and high food costs are forcing Canadians to cut back on their spending which is bringing inflation down. This shows that the Bank of Canada’s aggressive interest rate hike strategy is working and that there should be no need for the Bank of Canada to raise interest rates further during this cycle.
How Do Higher Interest Rates Impact Mortgages?
The Bank of Canada meets next on December 6 to decide whether or not to raise interest rates further. Again, the low reading suggests the central bank will hold its key lending rate at 5.0%, which is the highest level in 22 years. Should the economy stay muted, interest rate cuts could come as soon as the second quarter.
Maybe even sooner. The Bank of Canada may actually need to cut interest rates faster and further than initially expected to get ahead of the raft of mortgage maturities that threaten 20% of Canada’s discretionary income.
Roughly two-thirds of Canada’s mortgages by value are coming up for renewal over the next three years. Gone are the days of ultra-low rates during the pandemic. New higher, rates are expected to lift the average monthly mortgage payments by up to 15% in 2024, 30% in 2025, and a whopping 45% in 2026 if rates stay at current levels. Together, those additional interest rate payments account to a 20% reduction in disposable income.
That could spell disaster for Bay Street. Having to shift spending could also cut into household savings, some cash strapped Canadians may have to downsize (putting pressure on an already weaker housing market), while others could simply default on their mortgage, putting additional stress on Canadian banks.
Inflation may not have hit the Bank of Canada’s 2% target, but for the sake of the economy, it may not need to.
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Canada’s inflation rate cooled to 3.1% in October, in line with analyst expectations. Despite the slowdown, the biggest contributors to inflation continue to be rent and mortgage interest costs. With personal finances stretched and a wave of mortgage renewals coming, this could force the Bank of Canada to cut rates sooner, faster, and further than expected. How will this impact Canadian stocks? Ask the trading professionals at Learn-To-Trade.com.
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