Over Inflated?

Here we sit just 6 weeks into 2025, and I think we can safely throw out the 2025 bingo cards. Pretty much everything you didn’t think could happen has happened, and life has thrown in a couple extra events for good measure.

It wasn’t all that long ago that everyone knew, they just knew that inflation was dead, and that would lead to endless cutting by Tiff and Co. Well, I hate top break it to ya, but inflation certainly isn’t dead, it is now off of life support, and seems to be eating 3 meals a day. Let’s look at the January numbers:

Headline inflation rose from 1.80% to 1.90%. Okay, no big deal, right? Well, except for the fact that January was the 2nd month in a row where inflation crept up a little bit. That my friend is called a trend. Now, let’s also keep in mind that inflation went up even with the GST / HST holiday in full swing. So even with the government jumping on one side of the teeter totter with all it’s weight – inflation still managed to creep up a bit.

When you start to look at all the other inflation numbers – it only gets worse. As anyone who reads me regularly knows, I am a huge fan of CPI Trim ( the BOC also uses this as their primary indicator ) of inflation. CPI trim excludes very volatile items from the calculation so it is a better read on averaging out the inflation numbers. So, for example, eggs right now are making a lot of news South of the border. Egg prices are up ( although not as much as the media would have you believe ), but statistically they are up quite a bit. If you included the statistics of eggs in the inflation report, the number would go to the moon, but since it is a one time event ( or at least we hope ) and it is a small percentage of spend, by excluding that number, it gives you a more realistic reading. A very simplistic approach, but one that I think everyone can understand.

If we take a close look at CPI trim, it came in at 2.7% in January, up from 2.5% in December 2024. 2.7% is getting awful close to 3.0%, and all of this increase is coming amid a tax holiday. How bad would inflation have been without the tax holiday? Of course, the what is almost as important as the overall number, and January saw some big gains is gasoline, home heating, shelter costs and car prices. But hey, at least groceries declined, so that is good news.

But if we pull back a bit and look at the global picture, it isn’t looking a whole lot better. Inflation has been ticking up in the US, and will likely continue that pace as most of DJT’s policies are seen as inflationary. In the last 2 weeks the Federal Reserve has made it beyond clear that while they may not be raising rates in the near future, they also see no rush to drop rates. The US and Canada have gotten a lot of room between overnight rates, and if the US has signaled they are going to delay cuts, it makes it a tad bit harder for Uncle Tiff to continue dropping the overnight rate. Sure, The BOC can drop rates, but with the Canadian dollar still reeling from it’s last whooping, the CAD won’t have a lot of support behind it. David Rosenburg – a noted economist, surmised that the biggest inflationary gains in the January inflation report were items that were most correlated to the strength of the USD or the CAD weakness, whichever way you prefer it. If CAD keeps losing ground, it will become a negative feedback loop whereby inflation goes up, BOC raises rates, which causes economic problems, which leads to further CAD drops, which leads to higher inflation, and round and round we go. While the BOC does not have a Canadian dollar mandate, they certainly have to take it into account when setting policy – especially right now.

But if we look across the pond, the UK inflation report was also out yesterday, and inflation crept back over 3.0% for the first time in a while in January 2025. The report took a lot of watchers by surprise, and it appears that the inflation dragon is also haunting other parts of the EU as well.

I say all that to say this: Inflation is not dead, and is still something that needs to be heeded. As I predicted, bond yields have been all over the map in the first 6 weeks of the year, and I see no reason for that to change anytime soon. It is getting to the point where a 10 basis point move is almost a common thing, and no longer raises eyebrows. We started the year at 2.96%, went as high as 3.28% on January 14th, fell as low as 2.62% on Feb 03, and here we sit around the 2.87% / 2.88% range. Got whiplash yet?

Based off of the inflation reports we are seeing in Canada and abroad, don’t expect Uncle Tiff to give the gift of a 25 bp rate reduction in March. Market odds are pricing it at around a 28% chance of a cut, and I think that is fair. Of course, the world we live in changes daily, and who knows what could happen with tariffs, tax changes, or policy. As we come up to election season in the Province of Ontario, and a likely one coming federally in the near future, never under estimate the power of politicians to throw out a curve ball that completely changes the paradigm. There is a myriad of rules and regulations that could upend everything we currently know. After all, politicians will sacrifice the everyday worker if they think it will get them re elected.

We will see where we finish the week on the 5 year bond yield, but if we tick even a couple bps higher from here, expect some rate increase emails from your favourite lenders come Monday morning. 5 year Canadian yields were 2.62% on Feb 07, and today are at 2.87%. A 25 bp increase in 10 trading days is something that gets passed through to the end user, so get those rate drops requests in if you got em, and get the pre approvals in to hold the rates right away.

The Spring market should be the first time in years that buyers have the upper hand, with listings starting to accumulate already. Reach out to the pre apps you have had over the years, get the info up to date, get a rate hold going for them, and show these potential buyers, some who are overwhelmed, and disappointed from offers past where they got out bid, what the market is looking like. If they can get the rate hold in now at a decently lower rate, and all of a sudden there is a massive influx of supply, and prices start to trend down, it could be a great opportunity for a first time buyer to get into the housing market.

From the broker side, keep an eye on the Canada 5 year – any sustained creep above 3% will certainly bump 5 year rates. Keep an eye on the CPI reports, the unemployment numbers, and keep an ear out for any news on inflation creeping up – whether it be in Canada or globally.