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  • Writer's pictureEdward Ballsdon

Canadian Disinflation

Note provides charts and data on Canadian inflation to demonstrate that:

 

  • May’s data release saw a halt in the recent Core disinflationary trend

  • Clear bifurcation between Goods and Services inflation

  • Burden disinflation has stalled, whilst Choice inflation remains in deflationary territory, the lowest in 15 year

  • The proportion of components that have inflation less than 1% is now ~30% of the basket

  • The decline in inflation has taken Real Earnings positive, but only marginally so when discounted by Burden inflation

  • Rental accommodation inflation remains very high by historical standards, which is not seeing signs of abating. Indeed, https://rentals.ca/national-rent-report saw an accelerated rise in rent from 8.8% to 9.3%yoy in May. The decline in Rental inflation (8.3% to 7.9%) did indeed prove to be a false signal (as highlighted last month), with the May data increasing to a new high of 8.6%

  • Owned Accommodation inflation seems to have peaked, unsurprising given the decline in house price inflation

  • The Core inflation rate less Rented Accommodation, which represents 70% of the basket, ticked up to 2.3% from 2.1%

  • Following 5 consecutive months that CORE data printed at pre covid averages, May’s data brought a large increase compared to pre-Covid averages.

  • This was due to the aforementioned rental accommodation (6.8% of the basket) and increased Healthcare (4.6%) prices.

  • It is very unlikely that MonPol alone can impact these two components – arguably, high rental inflation is caused by higher interest rates

 

Rates are very restrictive in Canada and disinflation is occurring in the items where consumers have the discretion to spend. With Households deleveraging, the risk is that Canadian growth continues to stumble, which leaves the economy open to debt/deflation (something already starting in some areas of the economy). Worth bearing in mind that GDP per Capita has been declining for some quarters now.

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