The case for ending the Bank of Canada's interest rate hikes now
The May consumer price index (CPI) rose 3.4 per cent year over year, which was a big drop from the 4.4 per cent year-over-year number in April, but that doesn’t tell the real story.
Not surprisingly, there is a component of the CPI that is still showing significant inflation. The mortgage interest cost index was up a massive 29.9 per cent year over year. You would not be alone if you looked at that number and thought, “What the hell do they expect?” Shockingly, as sure as one plus one equals two, mortgage expenses go up for a good percentage of Canadians when the Bank of Canada raises interest rates.
When it comes to mortgage interest costs, a Bank of Canada interest rate hike is like suggesting that someone with high blood sugar should eat a sugar cube to bring their blood sugar level down.
The logic for the Bank of Canada to raise interest rates is to tame inflation and bring it back to two per cent. Of interest, their target for the longest time was between one per cent and three per cent. Of course, we can see that a meaningful component of CPI works diametrically opposed to the raise-rates-to-lower-inflation focus. Given this anomaly with mortgage interest costs, surely it makes sense to view CPI with this component excluded.
In May, if the mortgage interest cost index is removed, the year-over-year CPI is 2.5 per cent, very close to the target inflation rate. I repeat: the CPI excluding mortgage interest is 2.5 per cent. One year ago, this all-in CPI rate was 7.7 per cent. It has declined by 5.2 percentage points in one year. Whether it is from central banks hiking interest rates, or simply a normalization of inflation, after the COVID-19 roller-coaster on global economies, this a significant shift any way you look
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