August 2023 Inflation Watch

August 22, 2023

Key points:

  • Inflation experienced a jump of half a per cent from the previous month.
  • Fixed rate mortgages are very elevated, as bond yields are at their highest point in 16 years.
  • We likely won’t see the market decrease rates until Q3 of next year.

August 2023 inflation watch

Welcome to your August 2023 inflation watch. The most recent numbers from Statistics Canada signal a jump in inflation, so here’s what you should know about today’s market trends as we close out the summer.

Don’t feel like watching? Find the full transcript below!

Chris: [00:00:00] Stats Canada just released the July inflation numbers and they came in a little bit hotter than expected. And as you can imagine, the market had thoughts about it. Join me as we do a deep dive into the analysis and charts to try and make heads and tails of where Canadian mortgage interest rates are headed.

Inflation has increased – here’s why

Chris: [00:00:18] After months of steady declines, the Bank of Canada has revealed that in the month of July, inflation actually increased quite sizably by half a percent from the previous month in June, or 3.3% from the previous year. Now, when we strip away some of the more volatile aspects and look just at the core measures of inflation, which is the Bank of Canada’s preferred measure, we see that for two of the three core measures, inflation actually decreased very modestly by 0.1%. And for one of the measures, it actually remained flat. You can see this on the chart through the green, red and orange lines.

Chris: [00:01:02] It’s very disappointing to see inflation increase, but I think it’s important to dive into some of the numbers and analysis behind those inflation numbers. There are two things that I really want to point out to you as to the reason for the increase. Number one, here we are on Stats Canada’s website. This is a real irony. The mortgage interest cost index is up over 30% year over year and remain the largest contributor to headline inflation. The all items, excluding mortgage interest costs index rose by 2.4% in the month of July. So that means if we strip away mortgage interest costs, inflation in Canada would have been 2.4%. And this is a real irony because of course it is the Bank of Canada themselves that are creating that higher inflation, those high interest rates. And so that’s something that’s going to draw a lot of criticism and already has drawn a lot of criticism to the Bank of Canada and something that they are certainly in control of. And it’s a little bit of a double edged sword for them to try and manage and increase interest rates further when it further contributes to inflation in Canada.

Chris: [00:02:19] The other major contributing factor to the increase to CPI and also we should expect that we will see higher inflation numbers in the coming months is the base year effect. So the base year effect is essentially comparing current inflation to inflation 12 months ago. And as you’ll recall, inflation 12 months ago was very high. For example, last July, the CPI read was 9.1%. As we move forward, we start to strip away the base year and the base year starts coming down. So it becomes harder and harder to get lower inflation numbers as inflation starts to decrease compared to last year. Now, this chart, I think, is an interesting one because it shows month over month changes. So for 0% all the way to 0.4% month over month changes to CPI and effectively for four out of the five scenarios shown, inflation actually increases over the next six months over that 3% threshold or that target range that the Bank of Canada is looking for. So it should come as no surprise that we will see higher CPI numbers naturally because of this base year effect.

Rate expectations and bond yields

Chris: [00:03:33] So what does the high CPI print mean to Canadian mortgage interest rates? We are looking here at rate expectations for movements of the Bank of Canada quarter by quarter. And what I want to show very quickly with this chart is that expectations are remaining fairly hawkish, meaning that there is still an anticipation or more anticipation that the Bank of Canada will either hold or increase rates into the coming quarters. And you can see the probabilities of a quarter percent increase quarter by quarter, sorry, all this quarter talk going into the future and we don’t start to see the market pricing cuts until essentially Q3 of 2024. So a year out. Aside from having an impact on rate expectations for the Bank of Canada, this high CPI, persistent CPI has an impact on bond yields, which has a direct impact on fixed rate mortgages. And what I want to show you very quickly is the Government of Canada, five year bond yields. The current level that we sit at has not been seen since November of 2007. So that’s going back 16 years. We have not seen bond yields this high and therefore we have not seen fixed rate mortgages this high. So it is creating a lot of headwind in the real estate market, which is an entirely different discussion for another video. But rates are remaining very, very elevated.

Chris: [00:05:07] So what do we think about Canadian mortgage interest rates going forward? The next Bank of Canada meeting is in September, and I would agree with the probabilities that the market is pricing in that there is more likelihood, 70% chance that the Bank of Canada will hold the prime rate unchanged in September and wait till the next meeting when there’s more data to make a decision about whether to increase or not. In the meantime, you can see on this chart here where fixed rate mortgages lie five year fixed, three year fixed, the kind of benchmarks just for comparison, they have been creeping up with the higher bond yields and are again, at all time highs. Well, not all time, but at least 20 year highs and something that borrowers, new mortgage borrowers are having to take into account.

Need more help or information?

Chris: [00:05:57] My name is Christopher Molder. I’m a Toronto mortgage broker. Thank you so much for making it to the end of this video. If you found any value in today’s content, please consider giving me a like, please consider subscribing to my YouTube channel and if you have any questions or concerns or would like to reach out to discuss how these numbers impact you and your mortgage, the door’s always open. Until next time. Bye for now.

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