Welcome to February 2024’s Inflation Watch.
In this series I explore micro & macro economic trends and relate them to Canadian mortgage interest rates. I hope to shed some light on the future direction of interest rates to help you make more informed decisions about your mortgages.
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Inflation Trends
According to recent data released by Statistics Canada, inflation in January 2024 showed a promising decline from the previous month. Year-over-year figures indicate a decrease from 3.4% to 2.9%, surpassing expectations. This downward trajectory suggests positive strides in managing inflationary pressures, offering a glimmer of hope for lower interest rates in 2024.
Consumer Price Index (CPI) Components
A closer examination of the CPI components reveals notable insights. While overall inflation decelerated, five out of eight tracked components demonstrated a similar trend from December 2023 to January 2024. This suggests a broader-based moderation in price pressures, a reassuring sign for policymakers and consumers alike.
However, one component stands out amidst this trend: shelter costs. Despite the overall deceleration in inflation, shelter costs continue to accelerate, driven primarily by factors such as rising rents and mortgage interest rates.
James Orlando, a TD Bank senior economist, estimates that if we were to exclude the heavily weighted shelter cost from CPI – Canada’s inflation rate would be closer to 2.10%. See report here.
Bank of Canada’s Response
The Bank of Canada, tasked with maintaining price stability, has set a target inflation range of 1% to 3%, with a specific focus on achieving 2%. The latest inflation figures bring us closer to this target, instilling confidence in policymakers. Market reactions, such as bond prices adjusting favorably, indicate a positive outlook for mortgage rates in the near term.
Employment Dynamics
However, amidst the positive inflation outlook, concerns linger regarding employment dynamics. While Canada added 37,000 new jobs in January 2024, a deeper analysis reveals a nuanced picture. The gains were entirely part-time employment, overshadowing a net loss of 11,000 full-time jobs. This discrepancy underscores the importance of holistic assessments when evaluating economic health.
Implications for Mortgage Rates
Given the evolving economic landscape, the question arises: what do these insights mean for mortgage rates?
While immediate rate cuts may not be on the horizon, continued sub-3% inflation coupled with a slowing economy could pave the way for adjustments in the mid to long term.
Looking ahead, the upcoming Bank of Canada meeting in early March will be closely watched for any policy signals. While rate cuts in the immediate future seem unlikely, a cautious optimism prevails as we monitor inflationary trends and employment dynamics for potential shifts.
Conclusion
In conclusion, staying abreast of economic indicators is crucial for informed decision-making, particularly in the realm of housing and mortgages. The recent inflation data offers a glimmer of hope amidst ongoing uncertainties, signaling progress towards lower interest rates.
As we navigate the complex economic landscape, staying informed and proactive will be key to weathering uncertainties and capitalizing on opportunities that lie ahead.
Book a call with me if you would like to discuss how this information impacts you and your mortgage decisions.
