Statistics Canada has released new data about how the economy started off the new year, saying the country’s inflation rate has slowed and now sits at 2.9 per cent. One economist explains what’s behind the decline.
“Key parts of this decline are actually due to what’s called base effects,” David Macdonald, a senior economist at the Canadian Centre for Policy Alternatives, told CTV News Channel. “So particularly for gasoline, we’re comparing the prices to last January when winter storm Elliot hit and drove prices up.”
A “similar effect” is true for grocery prices, according to Macdonald, with “big increases” seen in late 2022 and early 2023 finally having worked out of the data series.
“That’s not because prices have come down,” he told Marcia MacMillan on Tuesday. “It’s rather because of the big price increases we saw this time last year.
“Substantial pressure” on shelter costs
Despite the year-over-year deceleration seen in gasoline and grocery prices, the skyrocketing cost of shelter in Canada remains a significant hurdle.
“Rent is at the second highest year-over-year rate we have seen over several years,” Macdonald warned. “Very big increases in rent.”
While the crushing housing stock shortage is partially responsible for skyrocketing rents, it’s not the only reason, according to Macdonald. The other? Higher interest rates.
“High interest rates drive costs higher for landlords and they push those costs down to tenants.”
He warns it’s a problem that may only grow as more homeowners with fixed-rate mortgages are forced to renew at a much higher rate than previously expected.
“By June, half of households who had mortgages will have renewed now at those higher interest rates,” Macdonald warned.
Will the Bank of Canada cut rates soon?
Despite Macdonald hoping the Bank of Canada considers cutting the key lending rate, he’s not optimistic, saying it’s “pretty unlikely” that a cut is coming in the March decision.
“Shelter costs are being driven by interest rates, an important part of why inflation is remaining high,” Macdonald says. “This isn’t wildly out of line with what they were predicting.”
Even though a rate cut would help homeowners and landlords cope with high interest rates — particularly those, according to Macdonald, with variable rate mortgages, or who have to renew — he doesn’t see a relief coming from the Bank of Canada until summer at the earliest.
“They want to see weaker economic growth,” Macdonald says. “In the Bank’s mind, (this) would decrease inflation over the long-term.”
