Since falling within the Bank of Canada’s target range in June, inflation has climbed up for two consecutive months. The Consumer Price Index rose 4.0% in August compared to a year ago. Steeper gasoline prices were the leading contribution to this headline acceleration.
The Bank of Canada must tread carefully as inflation begins to trend upward - presenting more challenges to reach their target. The Bank’s preferred 3-month core measure rose by one percent. In August, Canadians paid more due to higher energy prices, rent, and mortgage interest.
According to the Chief Economist at Dominion Lending Centres, Dr. Sherry Cooper, September inflation will likely increase due to higher gasoline prices. Dr. Cooper adds that the rise in core inflation measures increases the possibility of another rate hike this year.
Buyers have been holding off in the last two months after the consecutive rate hikes earlier this summer. Between July and August, home sales went down 4.1%, falling below the 10-year moving average depicted in the figure above.
More housing activity is expected in response to growing supply and the bank holding the policy rate at 5%. However, a burst in housing activity would not be ideal for the central bank as it could lead to another rate hike.
Despite housing affordability being a problem for buyers, new data released for the second quarter reveals a boost in first-time purchases.
The Canadian government has promised measures to address housing shortages and affordability issues. One of the measures pledged by Prime Minister Trudeau is to cut the federal Goods and Services tax on constructing new apartment buildings.
The Bank may be on the sidelines for now but given the current inflation concerns and the potential rise in housing and economic activity, future rate hikes are still in the cards for 2023. The next interest rate announcement by the Bank of Canada is on October 25th. Stay tuned for more updates!
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