<\/a>Last week Statistics Canada confirmed<\/a> that our Consumer Price Index (CPI) dropped to 2.8% in June, its lowest level in more than two years.<\/p>\n Anyone keeping an eye on Canadian mortgage rates may have been surprised when the Government of Canada (GoC) bond yields barely reacted.<\/p>\n That\u2019s likely because there are some compelling data to support the belief that inflation is headed higher in the months ahead.<\/p>\n To understand why inflation has almost certainly bottomed over the near term, we need to take a more detailed look at the significant disinflationary impact that base effects have had on our recent CPI data.<\/p>\n Let\u2019s start with a quick review of Stats Can\u2019s definition of base effects:<\/p>\n A base-year effect refers to the impact that price movements from\u00a012\u00a0months earlier have on the current month\u2019s headline consumer inflation. When a large\u00a01-month upward price change in the base month stops influencing or falls out of the\u00a012-month price movement, this has a downward effect on headline\u00a0CPI\u00a0in the current month.<\/em><\/p>\n Until now, most of the drop in our CPI from its peak of 8.1% down to its new low of 2.8% last month has been caused by higher price-change months rolling out of the back end of the CPI data set. This base-effect tailwind has made our current inflation look milder than it really is. But that is about to change.<\/p>\n Here is a table that summarizes the monthly CPI data (rounded) that were used to calculate our headline CPI results thus far in 2023.The first line in the table above shows that our CPI rose by 0.9% in January 2022 on a month-over-month basis (see number highlighted in red), and our CPI increased by 0.5% month-over-month in January 2023 (see number highlighted in green). When Stats Can added the January 2023 month-over-month result to our CPI data set (+0.5%), it also removed the January 2022 month-over-month result (+0.9%). The net result was that our headline CPI dropped to 5.9% in January 2023. While that was a decrease from the month prior, it still left our CPI at a multiple of the BoC\u2019s 2% target.<\/p>\n Let\u2019s now compare the six monthly readings that have been dropped from our headline CPI data set thus far in 2023 (highlighted in red) to the new monthly readings that were added in their place (highlighted in green).<\/p>\n The six monthly readings that were dropped averaged +1.0%. The six new monthly readings that were added averaged +0.43%. That means base effects have reduced our CPI by an average of 0.57% over the past six months.<\/p>\n Next, let\u2019s look at the numbers that will fall out of our headline CPI data set over the next six months (see numbers highlighted in yellow). They average out to +0.02%. For the base effect to have the same dampening impact on our CPI over next six months that it had over the previous six months, our monthly CPI readings will need to average -0.55%. (Spoiler alert: That\u2019s not happening.)<\/p>\n This is a big reason why BoC Governor Macklem recently noted that \u201cthe downward momentum of inflation is waning\u201d and why he warned that \u201cthe progress toward price stability could stall\u201d.<\/p>\n Now let\u2019s try to estimate a range that our headline CPI may be headed toward over the remainder of the year.<\/p>\n The graph below shows what will happen to our headline CPI if we average monthly readings of 0.0%, +0.1%, +0.2%, +0.3% and +0.4% for the next six months. The next question to ask is, are these assumptions about CPI readings over the next six months reasonable?<\/p>\n Consider the following:<\/p>\n I hope the explanation above helps clarify why the BoC hiked its policy rate by another 0.50% this summer and why the near-term trajectory of our headline CPI may compel them to continue doing so.<\/p>\n Inflation is going to bounce.<\/p>\n Forewarned is forearmed. The US Federal Reserve will issue its next policy-rate decision this week, and I expect that it will follow in the BoC\u2019s footsteps and offer a more-hawkish-than-expected rate view. If that happens, US bond yields will rise and GoC bond yields will be taken along for the ride.<\/p>\n Variable-rate mortgage discounts were unchanged last week. While I hope that variable-rate borrowers won\u2019t have to endure any further rate increases, for the reasons outlined above, I think the near-term path of inflation could compel the BoC to hike once again.<\/p>\n![\"Canada](\"https:\/\/www.integratedmortgageplanners.com\/blog\/wp-content\/uploads\/2023\/07\/CPI-Data-Table-2.jpg\")
<\/a><\/p>\n![\"Canada](\"https:\/\/www.integratedmortgageplanners.com\/blog\/wp-content\/uploads\/2023\/07\/Canada-CPI-forecast.jpg\")
<\/a>In four out of the five scenarios, inflation finishes the year above its current level of 2.8% and, in three of the five scenarios, significantly so.<\/p>\n\n
![\"Toronto](\"https:\/\/www.integratedmortgageplanners.com\/blog\/wp-content\/uploads\/2023\/07\/Rate-Table-July-24-2023.jpg\")
<\/a>The Bottom Line:<\/em> GoC bond yields were range bound last week, but lenders continued to raise their fixed mortgage rates.<\/p>\n