Lower Inflation is Good……right?

This morning marked the release of Statistics Canada’s February 2024 inflation report. As we all pretty much know by now, inflation was lower than anticipated, coming in around 2.80% as opposed to expectations of 3.10%.

Realtors and mortgage brokers have already bought new printers to print all the new rate sheets with the ” lower rates coming soon” off of today’s report. It seems that lower rates are now just around the corner……or are they?

While I will admit, today’s report was an all around good report, trouble could still lie ahead. The great news was that food inflation came in lower than the headline inflation number – the first time in almost 2.5 years. This is super news, as almost everyone I have ever talked to in my life requires food on a daily basis – so this should help. Cellular service and internet costs dropped again, and most people I know also use a phone or the world wide web daily. Gasoline ticked up, and housing inflation was still elevated, but most things did see a decrease month over month, and year over year.

However, before we start telling everyone to buy buy buy, let’s dig a little deeper and try and understand what today’s report meant. While inflation does seem to be easing off, let’s keep in mind that the BOC’s preferred inflation measure stick – CPI Core is still elevated at 3.15%. Let’s also remember the BOC’s mandate is to target inflation between 1% and 3% with a perfection of 2%. So, with CPI core still at 3.15% ( albeit lower than January’s 3.35% ) the inflation number that the BOC uses to determine whether they should drop rates is still well above the top end of their mandate. I agree we are moving in the right direction, but at this pace, it would still take another 6 to 7 months to hit a 2% core inflation number. I am not saying the BOC would wait until it got all the way down to 2% to cut, but the BOC and Uncle Tiff have been abundantly clear in the last 10 to 12 weeks that they want to see sustained downward pressure on inflation to ensure they don’t let off of the brakes too soon, and cause a real estate flare up. 2 months is not anywhere near a sustained trend, although it is the start of the trend. If we saw this gradual drop from 3.35%, down to 3.15%, down to 3.02%, down to 2.85%, etc. etc. then Tiff and Co. would have reason to believe it is sustained.

Bets for a June rate cut went up to 75% in the money markets today, so obviously the bond market is thinking today’s report is enough to move Tiff off his post, and cut rates. Maybe so, but I am not convinced.

Let’s remember that we are less than 30 days away from the federal budget, and if history is any indicator, I fully expect the governing party to unleash some pre election stimulus, which can help re-ignite the inflation embers. Let’s also not forget that the last 2 weeks or so has seen a lot of real estate activity all of a sudden, and that will not exactly put uncle Tiff’s mind at ease about cutting rates. Oil prices are climbing, and in just over 10 days time we will see a 23% increase to the carbon tax that we all know will flow into gasoline prices, diesel fuel prices, and pretty much all food.

All that aside, we have a Fed meeting this week, where it is 100% odds that Jerome and the Fed will not be cutting rates….now, or even likely in the next 3 months. Unlike Canada which has seen a gradual deceleration on inflation over the last 60 days, the US is experiencing a 180, and seeing a gradual acceleration of inflation. If inflation keeps chugging up in the US, you can take a rate cut off the table until late in the year. Tiff is going to have a bit of a problem cutting Canada’s interest rate when the US is not in lockstep. Not that it cannot be done, but by doing so, you help re ignite inflation. If Canada was to cut rates, and the US did not, the Canadian dollar would be beat up like a nerd on the school playground. A sinking Canadian dollar is bad for imports to Canada. Canada imports a lot, so if the Canadian dollar drops, it raises prices. Rising prices help inflation get going again. Rinse, lather, repeat. The further Canada cuts rates without the US being on the same page, the worse inflation could get, and the quicker it happens. As the old saying goes ” be careful what you wish for – you might just get it”. On top of this, the Central bank of Japan – BOJ for short, raised interest rates this morning for the first time in like a million years – okay, not a million, but, like 17 years.

All of that aside, I am still baffled and quite frankly bewildered as to why exactly brokers are pushing for lower rates? In order to get lower rates – it means the economy is not producing. Why would you wish for that exactly? Rates getting cut is a signal that all is not well in the economy. Rates getting cut means that house prices will re accelerate. I am always amazed that regulators in our industry will always make us take some bull shit exam on some useless info, but never once has mandated a course to teach brokers about basic economics. We help people will the largest purchase of their lives, but some of us really think dropping interest rates are a good thing? Of course, our regulators can’t stop the most basic fraud, nor ensure con artists don’t get a license, so I guess asking for some financial literacy is beyond them. I am sure that I will get some blowback on the regulator comment, and that is fine by me. Canada’s financial regulators are about as effective as a screen door on a submarine, so I am beyond fine calling them out on it.

But the real question that we should be asking is: What is the difference? Why is it that the Canadian economy is seeing now 2 straight months of declining inflation, while our neighbour to the South is seeing 2 straight months of increasing inflation? Why is the US economy firing on all cylinders and seems to have a lot of consumer demand, while the Canadian economy is slowly going in the opposite direction? 2 months does not a trend make, but again – it is the start of a trend. I always found economic data was like an appraisal – you need 3 good comps to make a market, and if we see the March numbers doing the same thing, it would indicate to me there is a real problem. If, and it is merely a guess at this point, but if we see the March numbers continue to decline, then I would increase my odds of the Federal government blowing their brains out on stimulus spending in the budget to head off either stagflation – or the ever dreaded deflation. Rest assured that the government will have the March inflation data long before the markets, so it will give them plenty of time to re jig a budget day speech if need be.

Lower inflation was celebrated earlier today, but could it be the calm before the storm, or the party before the hangover?