David Rosenberg: Time for Macklem to turn before it's too late


In contrast to the United States Federal Reserve, the Bank of Canada is running out of excuses to keep from acting as the proverbial deer in the headlights. The economy here is far weaker, fiscal policy is far less stimulative even with the spending largess in the federal budget, and there’s much more spare capacity being built up, particularly in the labour market.

The Bank of Canada, in its most recent post-meeting press statement, mentioned for the first time in years that the Canadian economy had swung into “excess supply” and added for good measure that “a broad array of indicators suggest that labour market conditions continue to ease.” Yet, the central bank continues to behave as if the economy is operating in an “excess demand” environment, which makes little or no sense at the current time.

The time has long passed to fiddle around on the sidelines even if Powell & Co. drag their heels, and it would hardly be the first time that the Bank diverged from the Fed. That said, one can reasonably expect the Canadian dollar to remain in the penalty box, but the country needs currency depreciation as an antidote to the relentless loss of domestic competitiveness (not exactly addressed in Tuesday’s budget).


Now, let’s go through the Canadian consumer price index (CPI) data. The headline came in at 0.25 per cent month over month, and we have seen benign numbers such as this (or lower) every month dating back to last September. The three-month trend is down to a mere one per cent annual rate and the six-month pace is at 1.65 per cent (to the second decimal place). All this points to a downward pull of the headline 2.9 per cent year-over-year rate — well off the 4.4 per cent trajectory a year ago.

The core CPI (ex-food and energy) came in south of 0.3 per cent for the fourth month in a row. The year-over-year trend is running at 2.9 per cent (it was 4.6 per cent a year ago), with the six-month trend at 2.7 per cent annualized and 1.9 per cent on a three-month basis. At a 2.9 per cent year-over-year rate, headline inflation is within the Bank of Canada’s target range of one per cent to three per cent, on the back of another stellar performance from core/underlying prices (also less than 0.3 per cent month over month and running at 2.9 per cent year over year for the old ex-food and energy index).

By any measure, core inflation dramatically eased in March. Two of the Bank of Canada’s three preferred core inflation measures receded substantially.

The median CPI inflation rate cooled off to 2.8 per cent in March from three per cent in February and 3.2 per cent in January — light years away from the 4.7 per cent pace of a year ago and the lowest it has been since July 2021. The “trimmed mean” metric, which excludes the most extreme movements among the various components, also moderated nicely to 3.1 per cent from 3.2 per cent in February, 3.4 per cent in January and 4.4 per cent this time last year. And the “common” CPI measure, which helps filter out idiosyncratic shifts in the ingredients that make up the CPI stew, slowed to 2.9 per cent from 3.1 per cent in February, 3.3 per cent in January and 5.7 per cent in March 2023. The decelerating path in all these underlying inflation indicators is undeniable at this point.

One index that we know the Bank of Canada looks at closely is called the CPIX, which strips out the eight most volatile segments and indirect taxes and this indicator came in at less than 0.2 per cent sequentially after three roughly flat monthly readings. The year-to-year trend here has been more than sliced in half over the past year to 2.1 per cent from 4.3 per cent. In other words, it is right on target.

It probably isn’t well known that the principal source of inflation in Canada is the product of central bank policy itself. By raising rates as much as it has, mortgage interest costs within the CPI have ballooned 25 per cent over the past year. Yes, yes, the chronic shortage of apartment units has sent rents up 8.6 per cent, but mortgage payments, which show up as inflation, have surged at three times that pace. Surreal.

Strip out mortgage costs and guess what? Inflation in Canada is on target at two per cent as well. So, why is the policy rate still at five per cent? We have real GDP growth running at less than one per cent at an annual rate (less than one-third the U.S. pace) and real interest rates, adjusted for the true core inflation measure, at three per cent. Monetary policy is simply way too tight, no matter how you slice it or dice it.

It is not just the actual price data that is easing, but the pressures on inflation point to further moderation ahead. To repeat, this is not the U.S. Over the past year, the number of people entering the labour market has nearly doubled the number of folks who have actually landed a job. If you still think we have an inflation issue on our hands, I would recommend you don’t share that view with the near-quarter-million people who have entered the ranks of the unemployed over the past year because they might punch you in the face — ranks that have swelled 23 per cent over the past 12 months. That is the math behind the full percentage point run-up in the headline unemployment rate over the past year, having broken above six per cent for the first time in over two years.

It isn’t just the jobs market confronting more slack, but the product market as well. The industry-wide capacity utilization (CAPU) rate of 78.7 per cent is at its lowest level since the end of 2020, when hardly anybody was lamenting about inflation. Look at pre-COVID-19 levels and you see that this CAPU rate was sitting at 80 per cent, the unemployment rate was 5.5 per cent and the key CPIX inflation rate, which is near and dear to the Bank of Canada, was at two per cent, which is nearly identical to where it is today. But where was the policy rate back then? Try 1.75 per cent, not five per cent.

It’s high time for the Bank of Canada to take its head out of the sand and move quickly to avert a possibly destabilizing recession, provided it’s not too late.

David Rosenberg is founder and president of independent research firm Rosenberg Research & Associates Inc. To receive more of David Rosenberg’s insights and analysis, you can sign up for a complimentary, one-month trial on the Rosenberg Research website.

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