Sacrosanct

We have all been waiting anxiously for inflation to fall to the BOC’s target of 2% for the last couple of years. People watch the monthly inflation releases more than I have ever seen in my entire career. But what if 2% doesn’t get the job done?

The UK reported their inflation data this morning, and headline inflation came in right smack on at 2%. With a Bank of England meeting late today, and elections in only 2 weeks time, it would seem like the perfect time to lower interest rates, right? Well, maybe, and maybe not. While headline inflation is at 2%, the Bank of England ( BOE ) is looking at the makeup and composition of the inflation rate. At today’s BOE meeting, there is a 95% expectation that they hold rates and do NOT lower.

Let’s remember that the UK had some of the highest inflation in the last 2 years in the developed world, with CPI peaking at 11.1% in October 2022. To get CPI from 11.1% down to 2.0% means that the Bank of England and raising interest rates have both done their jobs. However, within the headline inflation are many other indicators that we have discussed before like Core CPI, Services CPI, etc. etc. In the UK, as in a lot of other jurisdictions, we are seeing service CPI, wage CPI, and Core CPI still elevated, even though headline inflation is at, below, or heading towards target. I expect this will become a ‘ thing’ in future reports. Wages in Canada are still growing rapidly year over year, housing cost inflation is still well above the BOC comfort level, or really above peoples ability to pay, and this could lead to the headline CPI number being in line, while other parts of the report are still out of whack. When we look to the UK specifically, services inflation is still running at 5.9%. This is basically wage growth year over year. I will shout it from the roof tops until I die – if you have wages going up at damn near 6%, you will not get inflation down to 2%. If people are earning more – they will spend more.

Now, I realize that many people will say the UK is different, and in a lot of respects they are. However, what we are seeing in the UK is eerily similar to what we see in Canada; year over year wage growth and high shelter cost inflation. Even the BOE expects inflation to pick back up in the back half of the year due to timing, and the fall off effect of lower inflation prints a year ago rolling off the books now. Could Canada also see a pickup in inflation in the back half of the year? Quite possibly.

I say all that because I think it is important that you not get sucked in by inflation hitting some arbitrary 2% number in a government report to dictate what happens to your mortgage business going forward. Just like we saw Tiff cut rates 2 weeks ago with inflation well above 2%, we could also see central banks hold off – even though headline inflation is right on 2%. Inflation targeting is an art and not science. My guess is we see Core and Headline inflation ease off, but wage inflation and shelter inflation continue to be high. That may very well play in to future rate decisions.

Shelter inflation has been blamed on the BOC for raising rates. Tiff has taken an absolute shit kicking on that. The argument of course goes that if Tiff didn’t raise rates, then interest costs wouldn’t be elevated. Well, okay, however, the BOC and Tiff are not solely to blame. To be honest, I get really really sick of the people who constantly parrot ” if you remove high interest costs from inflation, then we are below 2%. Since the BOC could lower interest costs, it is their fault we have high inflation”. It literally wants to make me put a gun in my mouth every time I hear this. You cannot simply remove one component of the inflation index because it does not suit your narrative. Of course those same people were quiet as a church mouse from 2012 to 2019 when low rates artificially kept shelter inflation down, and kept rates low…..funny how that works. Shelter costs are up without a doubt. Now, had we not let property prices run wild for 10 fucking years, perhaps the prices would have been lower? Perhaps if major metro areas didn’t increase their building permit costs 40% in the last 18 months new homes would be affordable? Perhaps if property taxes didn’t go up double fucking digits in a lot of areas, people wouldn’t feel the pinch as much? None of that has to do with the BOC or Uncle Tiff. As they would say in the UK – Sod Off!

As we head into the hot days of summer, we will start to get a really good indication of where growth, inflation, unemployment, prices, GDP etc. were for the end of Q2, and start the setup for the Q3 models. We will get a glimpse into the thinking process of central banks in July when both the Fed Reserve and the BOC meet. Rates will likely bounce around on every report, but fixed rates should remain range bound – unless we see a number so strong in either direction that yields bust through a range. Nothing will be as bad as it may seem, but it also won’t be quite as good as it may seem. Keep a level head, work smart, and don’t let dogma and group think be the entire foundation of what your business is built on.

Cheerio!!