Price levels are rising. The annualized inflation rate in Canada has picked up the pace, increasing from 2.4% in October to 2.5% in November. But I should be more specific, for it was the expanded inflation rate that has risen, while the core inflation rate has actually slowed down to 1.6%.
Since July, core inflation has been dragging its feet, which was probably the reason why the Bank of Canada decided to cut down interest rates. The engine needed a boost, I suppose. As most central banks, the Bank of Canada uses core inflation to determine the direction of interest rates.
Problem: core inflation excludes eight of the most unstable items on the list, such as gas, housing and heating costs, which are also the ones that impact an everyday person the most. The good news: cooling core inflation is likely to foster more interest-rate cuts, which I find, as many homeowners do, always welcome news.
A TD Securities’ economist that I like to quote, Jacqui Douglas, commented in Tuesday’s “Globe and Mail” that, “This lower-than- expected core CPI reading certainly reinforces our call for another rate cut from the Bank of Canada at its next meeting in January. However, given the tightness of Canadian labor markets and the generally resilient economy, we don’t expect this to be the beginning of a long, drawn-out rate slashing cycle.”
Which bells were tolling the most? Well, according to Stats Canada, November gas prices increased the most — by 17.6%, which was the biggest jump since May 2006. Furthermore, mortgage-interest costs, homeowners’ maintenance costs, and even the costs of dining outside cost more in November, driving expanded inflation rate higher.
More specifically, mortgage-interest costs increased by seven percent, while homeowners’ maintenance costs increased by 4.9%. Offsetting these costs are lower house prices, but that is applicable only to the buyers. Sellers and homeowners not in the resale market are still paying the full price for the privilege of owning a home.
This is how an oxymoron like increasing inflation and the policy of decreasing interest rates can happen. Recall that fiscal policy makers “read” only the core CPI, yet the overall economy is impacted by every single item included in the consumer’s basket of goods and services, perhaps the most by the items excluded from core inflation. Perhaps this is one more perception that will have to be adjusted in order for these ever-changing economic and financial worlds of ours to move to their new equilibriums.