Peter Hall: Why the Bank of Canada should ignore the July inflation spike
Conventional wisdom has it that the Bank of Canada is not done raising interest rates. Statistics Canada reported last week that year-over-year increases in the consumer price index accelerated to 3.3 per cent in July from 2.8 per cent in June, despite a staggering numbers of rate hikes since early 2022.
Markets had expected an uptick in inflation, but not by that much. Pundits chorused that on balance the inflation report was bad news for the central bank, and that it increased the odds of more hikes to come. Were they right?
Dive into the details, and at first blush it doesn’t look great. But what wasn’t discussed in the news flashes was that certain key groups in Statistics Canada’s price basket were either deflating or in disinflation territory last month. The cost of household operations, furnishing and equipment — a category that accounts for almost 15 per cent of the basket — has fallen by an average of 0.5 per cent per month for the past three months. That’s an annualized drop of 5.9 per cent. Ouch.
It’s not alone. The clothing and footwear category has tumbled by 2.8 per cent in the past two months. Meanwhile, health-care costs have flatlined. About a quarter of the basket has already taken a hard hit from higher borrowing costs.
What also seemed to bypass the collective banter is the impact on inflation of interest rates themselves. The data show that mortgage interest costs — a line-item in the consumer price index — are up a whopping 30.6 per cent compared with July 2022. Nothing else in the index is even close.
The eye-popping number isn’t a result of some dated anomaly in the data. Monthly growth is still at a breakneck pace, on an annualized double-digit streak that is into its fourteenth month. At
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