The strategist answered questions from Gérald Fillion on the show. Economic zone Wednesday night.
Is there really the Ukraine effect in the data released Wednesday by Statistics Canada on inflation, particularly with food? Is this what most attracts our attention?
JIMMY JOHN – It’s starting to show, but the worst is probably yet to come. When you look at the import price indices, there are big increases. These are contracts that are often traded well in advance of inventories. Therefore, it is a safe bet that it will be some time before we feel the full effects. [de la croissance de l’inflation alimentaire]. But we must not forget that we had harvest problems and pressure when the war started in Ukraine. We already had significant pressure on the power supply. So the risks remain on the upside and this forces consumers to make choices, perhaps go to restaurants less or shop a little more.
Inflation stood at 6.8% in April compared to the same period in 2021, 0.1% higher than March data. Are we headed for a plateau or will inflation continue to accelerate?
not a word – Risks are on the upside, and the forecasting community is extending the time before inflation moderates. What this illustrates is that this is a completely new situation. We have never been in a situation where we come back from a pandemic, there are still logistical issues, countries struggling with pandemic issues, and there is a war. It is very difficult to predict this type of environment. It is a part of inflation that is very atypical.
But what complicates the matter even more is that we have a part of the inflation that is very typical, which is tied to the very tight labor market. There are also the salaries that, although they are not yet up to inflation, the intentions are there and the pressures are there. Expectations begin to rise higher and higher. So there are still risks of inflation persisting and central banks will have to take this perhaps even more seriously than they did.
The Bank of Canada is sending signals to raise on June 1 by 50 basis points, half a percentage point, and in July another half percentage point. Will this be enough to curb or reduce inflation?
NOT A WORD – it is questionable. Because even with these additional 100 basis points, we will still be at 2% nominal interest rate. And when you look at inflation, that means monetary policy is in very accommodative territory. There are some former heads of the US Federal Reserve who argue that rates should be around 5 or 6%. It would be extreme. The reason we are cautious is because we don’t know exactly what is actually related to the cycle. [économique] and what is related to the supply shock. But there is a need to raise rates.
If we raise interest rates too quickly, isn’t there a risk of causing a recession?
NOT A WORD – If we do it too fast, it will be too destabilizing. But there still needs to be a fairly muscular sequence in the short term to at least return to neutrality. Monetary policy should no longer be accommodative as it is now. After that, we will have to take his pulse. Look at the real estate market. We saw it in 2019, we had gone to a key rate of 1.75% and the real estate market had slowed down. We will see the same this time.
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Are rate hikes calming the real estate market?
NOT A WORD – Absolutely. We saw it in the numbers this week, with sales down over 12% in the country, we even saw the price index drop across Canada. This is very early in the recession cycle. It usually takes some time before prices start to fall, we already see weakness there.
It is also a sign that there has been an exuberance. The effect of rising rates makes it harder to qualify for a mortgage and makes payments more expensive. And that’s how monetary policy works. It is by slowing down the components sensitive to interest rates – real estate and purchases of durable goods such as cars and furniture – that everything will be called to slow down in an environment where the housing market will slow down.
Would you say there is a real loss in purchasing power for Canadian households right now?
NOT A WORD – Absolutely. And that is what has changed compared to 2020-2021. People marveled at the fact that disposable income was increasing, that household savings had increased. But when you look at those variables now and then take into account the effect of inflation, it normalizes a lot. We can say that we are around the trends that existed before the pandemic, but it is much less rosy than just a few months ago, given the strength of inflation. Yes, there is an erosion of purchasing power, but it is a necessary evil. If we want to curb inflation, we have to curb demand. We must curb the ardor of consumers.
Some comments have been edited for clarity and accuracy.
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