First National Financial LP®

Residential Market Commentary - Inflated inflation forecast

  • First National Financial LP

Much of the economic talk so far this year has centered on interest rates.  The main questions have been when will they start to rise and by how much.  In an attempt to provide answers economists and analysts monitor a key factor that guides interest rate policy: inflation.

Inflation has been a non-issue in North America for the better part of 40 years.  That’s largely because after the last significant bout of inflation, in the late ‘70s through the mid ‘80s, central banks in Canada and the U.S. were given the job of keeping it under control.  At that time the Bank of Canada rate topped 21%, and mortgage rates looked more like credit card interest.  

Interest rates are the traditional tool used to control inflation.  When it is deemed to be too low, and the economy stops growing, rates get trimmed to stimulate demand and spending.  When inflation is too high, rates are raised in an effort to cool off the economy.

Over the past month or so inflation has jumped up in both Canada and the U.S.  In March, Canada’s Consumer Price Index hit 2.2% on an annualized basis.  Up from 1.1% in February.  In the U.S., April’s CPI came in at 4.2%.  It was enough to rattle American stock markets, which experienced significant drops, at least for a day or two.

But one month does not make a trend and there are mitigating factors.  The increases in both countries are compared to the pandemic slump of a year ago.  The corresponding employment reports on both sides of the border were weak.  (Strong employment tends to drive inflation because more people have more money to spend.)  And, both the Bank of Canada and the U.S. Federal Reserve have been expecting inflation spikes as COVID restrictions are loosened.  Both have said they will not be responding to these temporary increases.  

The central banks are watching for sustained, core inflation in the 2.0% range.  The Consumer Price Index covers a broader range of products, including volatile items like food and fuel, that are factored out of central bank calculations.  Home prices are not part of the calculation either.  Houses are considered assets, not consumer goods.