Good morning, today is all about inflation, or more importantly, the lack thereof.
Consumer Price Index figures for July show that inflation continues to fade from the Canadian economy, with CPI growth dropping to its lowest level since March, 2021. Same goes for the U.S., according to data released last week. Across the continent, disinflation is one of the hottest trends of the summer.
So, have policy makers done the improbable, and slain the inflationary beast without sacrificing the economy? We’ll delve into that question below.
Up Top
- Time is on Alimentation Couche-Tard Inc.’s side as the convenience store operator attempts to acquire Seven & i Holdings Co. and endure what is expected to be a lengthy regulatory approval process for the Japan-based parent of the 7-Eleven chain.
- Canada’s miners, grain exporters and large retailers are braced for lockouts or strikes at both of the country’s big freight railways.
- Ottawa has approved a Quebec request to impose a six-month pause on new applications to the low-wage stream of the temporary foreign worker program in Montreal, with exemptions for several sectors.
- The spotlight is squarely on the health of the large Canadian banks’ loan books as they get ready to report fiscal third-quarter results over the next week, with the pace of growth likely to be sluggish and investors watching for signs that the risk of defaults is rising.
IN FOCUS
The long round trip of inflation
The Bank of Canada has what seems to be a pretty easy decision to make next month.DAVE CHAN/AFP/Getty Images
Has it really been three-and-a-half years since this whole inflation thing started? Time flies when you have to take on a second job just to afford butter.
But the end is nigh, in a good way for once. Inflation appears to be returning to where it belongs, with both Canada and the U.S. seeing 40-month lows in CPI growth in July. Dare we believe? Economics reporter Matt Lundy lets us know.
It’s been a while since we’ve had a nasty surprise on inflation, either here or in the U.S. How confident are you that things have normalized?
Quite confident. We’ve had seven consecutive months of headline inflation falling within the Bank of Canada’s target range of 1 per cent to 3 per cent. Many core measures of inflation are subsiding. And quite a few Consumer Price Index components are falling in price. Yes, price cuts. Here’s one example: Used cars were a big source of inflationary pressure a couple years back, but they’ve tumbled nearly 6 per cent in price from July, 2023.
Furthermore, Bank of Canada officials are getting more concerned that inflation could undershoot the 2-per-cent target. Previously, they were preoccupied with upside risks – various factors, such as the housing shortage, that could spark an acceleration in prices. But those risks are fading, too.
Food and shelter prices have been among the stickier categories. What do the latest numbers suggest in terms of how each is trending?
I’ll start with food. We’ve come a long way on that front. Year over year, grocery prices rose by 2.1 per cent in July, matching the increase in June. Keep in mind, we had peak increases of roughly 11 per cent in late 2022 and early 2023. Over all, food isn’t cheaper, but the price increases aren’t as shocking.
Shelter costs are still a tough area, if improving somewhat. Over all, those prices rose 5.7 per cent year over year in July. That was the first reading below 6 per cent since December. Still, we’re talking about pretty hefty increases. Rents, for instance, have risen 8.5 per cent over the past year. It’s possible that shelter inflation will return to “normal” levels, but housing will remain wildly unaffordable in big markets.
Have the central bankers done it? Have they solved inflation?
It certainly feels that way. Broadly speaking, they were dismissive of inflation back in 2021 (remember the “transitory” debate?) and slow to hike interest rates. But those rate increases are working as intended. Canadians have cut back on spending and the economy has been in “excess supply” for many months, which is helping to curb price pressures. Also, many households are facing the prospect of renewing their mortgages at much higher rates over the next two years. The Bank of Canada has noticed that borrowers are setting aside more cash for that scenario, or they’re making lump-sum payments to mitigate the increase in their monthly bills.
All told, we’re getting closer and closer to the 2-per-cent inflation target.
What would it take at this point for the Bank of Canada not to cut in September?
In all honesty, I’m not sure that’s possible. Money markets have fully priced in a rate cut for September, plus additional cuts in October and December. Those bets can change, and perhaps they will for meetings further down the road. But so far as September is concerned, you would need some shockingly hot economic data, and we’re running out of time. Statistics Canada will publish retail sales numbers on Friday, plus gross domestic product on Aug. 30. With consumers and businesses getting pinched by higher rates, it’s tough to foresee a huge upside surprise in either report.
If anything, the central bank’s recent communications show it’s concerned about growth. Further rate cuts would help on that front.
CHARTED
Cast your mind back, painful as it may be, to when global financial markets were in the throes of a burgeoning investor panic. There was something about a Japanese yen carry trade gone wrong and the U.S. economy was on the precipice of a recession. It’s all a bit hazy considering it was two whole weeks ago. But from the ashes, a new era has sprung.
On Monday, Canadian stocks marked a full recovery from the summer selloff, with the S&P/TSX Composite Index hitting a record high. The benchmark is now up a solid 9.9 per cent on the year. It serves as a good lesson for everyone to keep their composure the next time turmoil grips the markets. Or we could freak out again, like we always do.
THE OUTLOOK
On our radar and reading list
Today: Several big U.S. retailers report second-quarter earnings, including TJX Companies Inc. – the parent of the TJ Maxx, Winners, HomeSense and Marshalls chains, as well as Target Corp., and Macy’s Inc. Investors will be looking for signs of consumer resilience, which have been crucial to reversing the recent stock market selloff.
Tomorrow: Toronto-Dominion Bank is set to be the first of the Big Six to report fiscal third-quarter financials. TD’s U.S. business is under intense scrutiny, in no small part because of the bank’s anti-money laundering lapses.
Attention Swifties! Data show you may be better off booking hotel rooms closer to the date of the big event rather than several months in advance. This goes for Taylor Swift shows and Games of the Olympiad alike.
Weak Chins: If you’ve ever wanted to strengthen your jawline, you need to get on TikTok. There, you’ll quickly learn about a technique called “mewing.” Don’t bother asking if this is one of those fads that social media takes to toxic extremes. You already know the answer.
Morning markets
Global markets were mixed after a weeks-long rebound toward record highs, as investors hoped for clearer clues on Friday from the Federal Reserve on the size of future interest rate cuts. Wall Street futures and TSX futures pointed higher after the markets snapped their eight-day winning streak yesterday.
Overseas, the pan-European STOXX 600 was up 0.29 per cent in morning trading. Britain’s FTSE 100 rose 0.12 per cent, Germany’s DAX advanced 0.39 per cent and France’s CAC 40 gained 0.43 per cent.
In Asia, Japan’s Nikkei closed 0.29 per cent lower, while Hong Kong’s Hang Seng fell 0.69 per cent.
The Canadian dollar traded at 73.49 U.S. cents.