Canada Inflation Peak Predicted for Fourth Quarter
Canada’s core inflation is projected to peak in the fourth quarter of 2023, according to economists. While a recession may be necessary to curb inflationary pressures, analysts anticipate a gradual decline in core inflation throughout 2023, though the return to the Bank of Canada’s two percent target will be a slow process. The central bank has already implemented significant interest rate hikes, raising the policy rate to 3.25 percent – the highest level in 14 years – in an effort to manage rising prices.
The economists’ forecasts are primarily based on several factors. Firstly, the overall growth in the Canadian economy is expected to slow down. Secondly, housing prices are predicted to decline, easing pressure on the housing market. Lastly, disruptions within global supply chains are anticipated to lessen, further contributing to the moderation of price increases. Six of the eight economists surveyed by Reuters identified these domestic and international factors as signs that core inflation is becoming entrenched.
A key component of this analysis is the average of three core inflation measures – CPI Common, CPI Median, and CPI Trim. These measures collectively represent a more accurate indication of underlying price pressures within the economy. The composite average reached a record high of 5.3 percent in July. This elevated level highlighted the significant challenges the Bank of Canada faces in bringing inflation back to its target. The economists’ view is that inflation will descend slowly throughout 2023.
Doug Porter, chief economist at BMO Capital Markets, emphasized the expected persistence of inflation, stating, “We believe that it will be sticky, and will descend only slowly through 2023.” He noted that rapid cooling of growth, a pullback in housing prices, and reduced supply chain pressures will play a crucial role in capping core inflation.
The increasing pressures on wage settlements and rising consumer and business inflation expectations also contribute to the concerns about entrenched inflation. These factors reinforce the argument that more aggressive interest rate hikes will be needed to prevent a sustained surge in prices. Six of the eight economists surveyed recognized these signs of entrenched inflation.
The Bank of Canada, acknowledging these challenges, has already raised interest rates by 300 basis points over the past six months. Senior Deputy Governor Carolyn Rogers stated that the bank still sees a path to a “soft landing,” emphasizing the objective of cooling the economy to return inflation to the two percent target. However, the timeline for this return remains uncertain.
Nathan Janzen, assistant chief economist at Royal Bank of Canada, suggested that aggressive interest rate hikes would likely be followed by a recession next year, preventing expectations from fully unanchoring. This scenario would, in turn, limit the Bank of Canada’s ability to respond with further rate increases.
Economists at Desjardins Group and Oxford Economics also anticipate aggressive rate hikes leading to a mild recession, though they emphasized that this downturn would be relatively short-lived. The Bank of Canada remains hopeful that it can achieve a soft landing—slowing economic growth without causing a significant recession.
Most economists agree that the return to the two percent target is a 2024 story. “We think that’ll be a 2024 story,” said Beata Caranci, chief economist at TD Securities. “But there should be compelling evidence that the data is trending in that direction within the second half of 2023.” The Bank of Canada anticipates that sufficient evidence will be present by the latter half of 2023 to support this optimistic outlook.
© Thomson Reuters 2022
