Toxic Mix in Canada: Spiking Inflation, Variable-Rate Mortgages, and a Housing Bubble
What will the Bank of Canada do?
The Bank of Canada has nudged up its target rate four times, starting July a year ago, from 0.5% to 1.5%. It last hiked on July 11. But now it is facing inflation that suddenly and unexpectedly jumped at twice the Bank of Canada’s current target rate.
Canada’s Consumer Price Index (CPI) rose 3.0% in July from a year earlier, the hottest since September 2011, Statistics Canada reported on Friday. Consensus expectation was a rise of 2.5%, same as in June.
Prices rose in all major components. Prices for services – the largest part of consumer spending – jumped 3.2% year over year, up from a 2.2% increase in June.
In most provinces, CPI ran even hotter:
- Alberta : 3.5%
- Prince Edward Island: 3.4%
- Manitoba: 3.3%
- British Columbia: 3.3%
- Ontario: 3.1%
- Saskatchewan: 3.1%
- Newfoundland and Labrador: 2.7%
- Nova Scotia: 2.7%
- New Brunswick: 2.7%
- Quebec: 2.4:
But no problem.
Like the Fed and other central banks, the Bank of Canada has its “preferred” measures of inflation. And they’re a lot lower, of course. Which is the point. But unlike the Fed, it does not use a core index “without food and energy.” Instead, it has three measures (definitions) that have been statistically “trimmed:” CPI-trim, CPI-median and CPI-common.
Its stated goal is to keep inflation as measured by these three indices at the 2% midpoint of “an inflation-control range of 1% to 3%.” And this is how these three indices stacked up in July:
- CPI-trim: 2.1%
- CPI-median: 2.0%
- CPI-common: 1.9%
Statistically trimming the hot items out of an index works miracles, though it makes this trimmed index even more meaningless to consumers because consumers, who live in the the real world, cannot trim those items out of their budgets quite so easily. So now, after a proper trimming of the index, the BOC is right on target.
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