The timing of interest rate cuts by the Bank of Canada will be influenced by the evolution of the economy and inflation trends. Monetary policy is forward looking; to avoid overshooting its 2% inflation target, the Bank will need to ease off the brakes beforehand. If inflation remains at or below 3% and the labor market maintains a balanced state, the Bank will likely consider lowering rates. We expect these conditions to materialize by Q2 2024, enabling the Bank to proceed with rate reductions.
Inflation continues to slow
Consumer price inflation slowed to 3.1% in October from 3.8% in September on a year-over-year basis, driven primarily by decreased gasoline prices. Despite this progress, it is not enough for the Bank to signal a rate cut.
We continue to see cooling inflation on the goods side, with core goods prices up 1.7% year-over-year in October. Durable goods inflation has cooled to just 0.3% year-over-year, helped by softer price increases for vehicle purchases and price deflation observed in big-ticket household items such as furniture and appliances.
Service prices remain the challenge. In October, services inflation rose to 4.6% year-over-year (compared to 3.9% in September) due to elevated prices for travel tours, rent and property taxes, and other additional fees. Rent inflation jumped up to 8.2% year-over-year from 7.3% in September. Additionally, municipalities across Canada raised property taxes and other related charges by 4.9% year-over-year.
The good news is that core measures were soft, with the median up 0.1% and trim up by 0.2%. (Median and trim inflation measures strip out the volatile components of the core inflation measure.) Importantly, the three-month annualized trend eased to 2.7% for median and 3.2% for trim. CPIX, which is an alternative to the standard CPI inflation measure and excludes mortgage costs, decreased to 2.7% year-over-year, while the three-month trend hit 2.1%. It’s worth mentioning that most core measures have hovered within or near the Bank’s 1-3% target range in recent months.
Labour market finds balance
The vacancies-to-unemployment ratio has been a key indicator of the labour market imbalance observed in recent years. A higher ratio typically indicates more job opportunities relative to the number of unemployed individuals, suggesting a tighter labor market, while a lower ratio signifies fewer job openings compared to the number of job seekers, indicating a looser labor market.
In late 2021 and early 2022, we were seeing one job opening for every unemployed person in Canada. Although this ratio has been falling, it remains higher than the pre-pandemic level of 0.5 vacancies per unemployed person. With the economy beginning to stall, job openings will likely slow and rapid population growth should increase pressure on unemployment rates. These factors are likely to push the unemployment rate to 6% early next year.
The question arises: will this level of labour market slack be sufficient for the Bank, or will it wait for unemployment to rise further? Our view is that the Bank will likely want to see further labour market slack and opt to wait until unemployment is closer to 6.5%, a level we anticipate reaching by Q2 of next year.
Housing Affordability Watch
CMI monitors the latest developments and offers insights on solutions to Canada’s housing affordability crisis
The factors leading to Canada’s housing crisis are as varied as the potential solutions. The most pressing challenges are faced by Canada’s largest cities, where intensification strategies must be feasible in a way that is acceptable to existing residents. Urban planners have been focused on the ‘missing middle’ – medium-density housing somewhere between single-family residential properties and high-rise condominiums – as a solution. By allowing for ‘light’ intensification, cities can increase density, build homes that are more affordable, and potentially create greener communities.
Middle housing structures, like duplexes, triplexes, four-plexes, and row houses, have largely disappeared during the past 60 – 70 years as single-family homes became the dominant form of housing. These rare but sought-after building types offer diverse housing options, support locally serviced retail and transit options, and help to address affordability, since smaller homes cost less to rent or purchase and to maintain.
Addressing the missing middle is key to solving Canada’s housing crisis. The challenge is that this form of housing lacks a proper financing framework. Despite new developments being the biggest potential avenue for creating missing middle housing, there isn’t a specific program to support construction financing for this category.
This week’s Housing Affordability Watch takes a closer look at these challenges and examines potential solutions. Read it here: CMI Housing Affordability Watch: Show Me the Money – Navigating Financing Challenges for Missing Middle Housing Projects
Independent Opinion
The views and opinions expressed in this publication are solely and independently those of the author and do not necessarily reflect the views and opinions of any person or organization in any way affiliated with the author including, without limitation, any current or past employers of the author. While reasonable effort was taken to ensure the information and analysis in this publication is accurate, it has been prepared solely for general informational purposes. Any opinions, projections, or forward-looking statements expressed herein are solely those of the author. There are no warranties or representations being provided with respect to the accuracy and completeness of the content in this publication. Nothing in this publication should be construed as providing professional advice including investment advice on the matters discussed. The author does not assume any liability arising from any form of reliance on this publication. Readers are cautioned to always seek independent professional advice from a qualified professional before making any investment decisions.
