May 2023 Inflation Watch

May 23, 2023

Key points:

  • Inflation came in higher than expected in April, reaching 4.4% compared to the forecasted 4.1%.
  • Core inflation continues to trend downward.
  • The Bank of Canada will likely not need to raise rates again, but this will become a risk if inflation keeps on this trend.

May 2023 inflation watch

In this video, I review how inflation has evolved over the past month. We saw inflation come in a bit higher than expected, but does this mean rates are bound to increase? Here’s what you should know.

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

Chris: [00:00:00] Welcome to the May 2023 Inflation Watch, where I do analysis of inflation and how it relates to Canadian mortgage interest rates. If this is your first time here, welcome. Please be sure to like and subscribe so you don’t miss future content. Let’s dive right in.

Inflation came in higher than expected in April

Chris: [00:00:17] We have to address the elephant in the room and that is for April 2023. Inflation came in higher than anticipated. The forecast was 4.1%, the actual was 4.4%. And so that’s created all these articles and all this revisiting of increases to interest rates, which I’ll address later on in the video. Let’s dive a little bit deeper into what caused the increase to the CPI number for the month of April.

Chris: [00:00:45] There are two factors that have driven up CPI in April of this year, housing and fuel. Housing costs are up very significantly and that is due to the increase in interest rates. So specifically, mortgage interest rate costs are 28% higher than in April of 2022. And that’s no surprise, of course, because anybody who has a mortgage knows that interest rates have increased way more than has been comfortable, and that’s reflected in higher mortgage costs. In addition to that, rent has increased, too, by 6.1% compared to last year. The second factor, which is fuel, is up 6.3% compared to March of 2023. Now, why is that? This is something that I documented in my last video, and that is that the oil cartel, OPEC, has decided to cut supply in anticipation of a possible recession. And that has that cut supply has driven fuel costs higher. Now, there is some good news. There is a silver lining, and that is that food prices have actually come down from 9.8% to 9.1% from March to April. So that’s a good sign to see that fuel costs and fuel sorry, food costs and food inflation is starting to subside.

The Bank of Canada will likely continue to hold rates

Chris: [00:02:11] While headline CPI, which is this blue line, has ticked upwards. The preferred measure for inflation, which is core inflation, has continued to trend downward. As you can see in this chart, the red, yellow and green lines represent the various core inflation numbers and they continue to trend downward. So that’s good news for the Bank of Canada. So the question now becomes how does the market respond to this surprise inflation reading? We’re looking here at the Canadian five year bond yield chart. And you can see on Tuesday when the inflation numbers were released, that sudden jump of the five year bond yield, it went up about a quarter of a percent. And what that quarter percent represents practically is that the chances of the Bank of Canada increasing the prime rate on June 7th, which is the next meeting, increased by 25%. So 25% chance of an increase and a 75% chance of a hold.

Chris: [00:03:11] The April inflation read reminds us how precarious the path to the 2% target rate of inflation is for the Bank of Canada. There will be twists, there will be turns, and it makes this job really difficult. It also highlights that there is probably more risk of an increase to interest rates versus decrease in the near term. Now, looking forward, all things equal, I don’t think that the Bank of Canada will need to raise the prime rate further this year. The more likely scenario is a hold, but with a big but a big asterisks that if this trend continues, if we see inflation continue to trend upward and a trend line develops, then the Bank of Canada will have no choice but to continue raising interest rates. Something to look out for in the future. Looking at the forecast, though, it remains unchanged that the Bank of Canada will keep the prime rate flat until 2024.

Chris: [00:04:13] Looking at fixed rate mortgages, they’ve kind of stabilized in the 4% range, so insurable mortgages are currently at 4.39%, five year fixed uninsurable. So that means over $1 million purchase price or a 30 year amortization is at 4.89% in the market. Most banks are higher, but we can find it at 4.89. Three year fixed, which remains the most popular rate option right now given the short term nature of it and the expectation that in the future rates will be lower, we can find them anywhere from 4.84% to 5.14%. Now, one thing to pay attention to is that if bond yields continue to rise or stay high, that will put pressure on these rates to actually trend upward versus downward. Short term, though, I think things are going to stay stable at about this level.

Need more help or information?

Chris: [00:05:04] My name is Christopher Molder. I am a Toronto based mortgage broker. I do these inflation watch videos every month after the Bank of Canada releases the data. If you found any value in today’s video, please consider leaving me a comment, like or subscribe to my YouTube channel. Until next time, bye for now.

If you’d like to discuss your mortgage, you can contact me here or schedule a convenient call time directly into my calendar below.