Chad Moore Calgary Mortgage Broker

The Bank of Canada (BoC) released their Monetary Policy Report (MPR) for October. Here is a breakdown of their inflation outlook, with commentary related to Calgary’s Mortgage and Real Estate market.

What Is The Inflation Target And CPI?

The Bank of Canada (BoC) has a 2% target for inflation. This is measured primarily through the Consumer Price Index (CPI). CPI is a theoretical “basket of goods” economists measure for price changes.

September 2020 Inflation – Yeesh

September 2020 CPI is 0.5% which means the cost of the basket of goods, on average, rose 0.5% in September. This is very very low. Our central bankers like to see prices rise by 2%.

“Prices for CPI components that fell sharply because of weak demand early in the pandemic, including gasoline and travel accommodations, remain low compared with their levels from a year ago. Meanwhile, prices for products that saw a surge in demand early in the pandemic have started easing (household cleaners for example).”

How does your personal consumption track with this statement? Have you been spending less on travel and accommodation since March? Did you spend more on items in the Spring that you are now not spending?

Core Measures Of Inflation

Within the last couple of years the Bank of Canada created three core measures of inflation. Why? Well, the basket of goods measured in the Consumer Price Index (CPI) can be rather volatile. The BoC wanted to smooth out the measurement of inflation. Canada’s central bankers created CPI – Trim, CPI – Common and CPI – Median. The BoC has also created a new pandemic inflation measurement – Adjusted price index.

Conspiracy Thoughts …

Let’s not venture too far off the reservation here …

At anytime the Bank of Canada can adjust how inflation is measured by altering what prices are monitored and the weighting of items in the “basket of goods” measuring CPI.

Inflation is the general measurement of how my cost of living is changing. Is your monthly budget reflective of today’s low inflation?

Conspiracy thinking cap off now :-).

Here is a graph from the Monetary Policy Report showing the steep drop off of Canada’s CPI, core measurement range and new “adjusted price index”.

The Alberta government also track inflation for a fixed basket of goods. This is a chart from Alberta’s economic dashboard for context:

Rising Inflation Indicators:

Energy (ATB) & Economic Slack

“The path for CPI inflation over the next year largely reflects the dynamics of energy prices and the gradual narrowing of excess capacity.”

Lower gasoline prices, combined with less consumer travel (vehicle and air) will pin inflation down until early 2021. Once energy consumption begins to return, excess slack in the economy will also help determine a return to inflation. Energy consumption is one thing, but what about Canada and Alberta’s energy sector?

ATB Data Highlight …

Earlier this week ATB published Stats Canada data on the energy sector:

• Canada’s energy sector contributed about 9% of Canada’s GDP.
• Canada’s energy sector accounted for 1.6% of all jobs in our country.
• Alberta hosts HALF of all energy sector jobs in Canada.
• Alberta’s energy sector accounts for 6.5% of total provincial employment.
• Energy sector jobs, paid on average, the most of all sectors of employment.

Economic Slack

Economic slack is the spread between the maximum economic output and the current economic output. As this gap closes, more inflationary pressure builds. Stephen Poloz, previous BoC governor, referred to this as “bringing the economy home” from the 2014-2015 oil price shock. “Home” meaning the intersection of full economic potential and 2% inflation. Here’s a link to an article I wrote October 2017 on the matter (http://www.chadmoore.co/four-monitoring-issues/).

I think the Bank of Canada notes relatively flimsy reason for upward pressure on inflation being “COVID-19 fees”. These fees might be cleaning fees at hair salons, for example.

Pre-pandemic, with a record low unemployment rate, growing stability in Alberta’s energy sector, booming housing prices nationally and a red hot U.S economy (Canada’s largest trading partner) – Canada was barely achieving the 2% inflation target.

Responses to a question on long-term inflation is expectations show an average of 2.0 percent through 2030.

Conclusion:

Elsa’s spell has frozen Canada’s key overnight lending rate.

 Kristoff & loyal Reindeer are energy prices, energy consumption, and energy jobs on a mission to the Ice Palace to save our land.

Anna is delivering the message that consumer spending is the main path to thawing Elsa’s heart and Canada’s economy. 

And Olaf, the comic relief snowman?  That might be our policy makers, haha.

Be sure to connect with me about your next home purchase, deciding to choose a fixed or variable interest rate.

403-809-5447
chad@canadamortgagedirect.com

Cheers,
Chad Moore