Posthaste: Inflation saga is far from over, warns TD

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Good morning!

Despite a fifth consecutive rate hike by the Bank of Canada, a new TD Economics report warns there is still more “bad news” out there on the inflation front, with rising prices now being driven by “domestic” forces as “external” ones start to recede.

So-called headline inflation pulled back in July to 7.6 per cent from 8.1 per cent in June, something TD vice-president and chief economist Beata Caranci and senior economist James Orlando on Tuesday described as “modest good news” in their report, Canadian Inflation: The Long and Winding Road.

However, the pair went on to note “the bad news is that the past surge in goods prices has bled into the service side of the economy, which is captured within core inflation metrics. Prices for services tend to be more sticky, raising the risk of an elongated period of high inflation.”

Echoing TD, the Bank of Canada cited inflation in services as one reason why it raised its benchmark rate another 75 basis points to 3.25 per cent.

“Inflation excluding gasoline increased,” the central bank said in its official statement, “and data indicate a further broadening of price pressures, particularly in services.” 

Caranci and Orlando said most of the elevated inflation readings from the last year can be attributed to excessive demand combined with disrupted global supply chains and high prices for commodities such as oil.

But the tide is turning, they said.

“This dynamic is now reversing on a significant slowdown in global demand that is easing pressure on supply chains and commodity prices,” they said. “These externally driven sources of inflation will continue to shrink in importance and pull down headline inflation.”

That leaves Canada’s “hot” domestic economy in the inflation driver’s seat, they said, and being steered by higher “mortgage rates, rents, restaurant services, entertainment, personal care.”

As a result, the Bank of Canada’s three core inflation measures have grown by “at least five per cent year over year,” something the central bank also noted in its statement.

Services inflation is essentially the next chapter in the inflation story Caranci and Orlando said in the report, noting that in other instances, price increases in services have historically peaked a year after the main inflation reading has retreated. Services inflation “takes longer to rise, but once it does, it can linger even in an economic downturn,” they said.

What does this mean for the Bank of Canada and inflation?

That depends, Caranci and Orlando said, in their analysis on whether the Bank of Canada has the nerve to transition away from reacting to lagging and in-the-moment data. (The consumer price index is an example of lagging economic data since the freshest reading is for the previous month.)

Doing so could allow the central bank to pause its rate hikes at 3.5 per cent, the TD economists said. But it could also risk allowing inflation expectations to run away, something governor Tiff Macklem indicated in a Financial Post op-ed that he won’t let happen. “We know our job is not done yet — it won’t be done until inflation gets back to the two per cent target,” he wrote.

In other words, rate increases could continue into 2023, the TD pair said, adding: “Tackling inflation appears straightforward in theory, but not in execution. So buckle up, there’s a lot of ambiguity littering the road ahead.”

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KIM KARDASHIAN The reality television star and social media personality is expanding her business empire by striking up a partnership with former Carlyle Group partner Jay Sammons to create a private-equity investment company, according to a report by the Wall Street Journal. The report said the duo, whose company is called SKKY Partners, will invest in sectors such as consumer products, hospitality, luxury, digital commerce and media. Kardashian is no business neophyte, having had success with shapewear label Skims and makeup brand KKW due to their popularity with young shoppers and her huge social media following. Skims was valued at US$3.2 billion in January. Photo by Mario Anzuoni /Reuters

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• Bank of Canada senior governor Carolyn Rogers gives a speech in Calgary

• U.S. Federal Reserve chairman Jerome Powell is interviewed in Washington on monetary policy
  

• European Central Bank announces rate decision

• Peter Routledge, head of the Office of the Superintendent of Financial Institutions, discusses in Toronto the big issues facing the agency and how it is evolving to meet future challenges

• Scotiabank hosts the 23rd Annual Global Banking and Markets Financials Summit beginning with a Q&A session BNS CEO Brian Porter

• Shopify Inc. and Canada Goose Holdings Inc. are among the companies participating in Goldman Sach’s 29th annual retail conference

• Today’s data: Retail commodity survey for June, U.S. initial jobless claims and consumer credit

• Earnings: Transat AT

 

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• Lagging loonie unlikely to get a boost from rate hikes as greenback stays strong

• On our way to 4%? What economists say about Bank of Canada’s statement

• Canada’s home sales and prices are falling. Has something changed in the housing market?

• Developed economies feeling U.S. dollar pain in an emerging market way

• How Canadians can split their income and lower their tax bills

• Apple unveils iPhone 14 with emergency satellite messaging, Ultra Watch

• Canada’s top telecoms agree to support each other during outages — minister

• Cineworld files for U.S. bankruptcy as it struggles with debt

 

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The Bank of Canada on Wednesday delivered another super-sized hike, raising the policy interest rate by 75 basis points to 3.25 per cent, the highest since the global financial crisis.

The central bank also signalled it was continuing its quantitative-tightening policy and more rate hikes would follow in an ongoing effort to stamp out decades-high inflation.

The central bank noted inflation pressures had eased to 7.6 per cent in July, but core inflation continued to climb to a range of five to 5.5 per cent. The drop in the consumer price index was largely led by falling gasoline prices and the latest reading is still too hot for the economy to handle.

The Financial Post’s Stephanie Hughes has the full story.

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Certain politicians have dismissed the idea that the U.S. is currently in a recession. But if you look up the definition, it seems like we can’t avoid using the “R” word anymore. A recession is defined as two consecutive quarters of real GDP contraction. And real GDP in the U.S. decreased at an annual rate of 1.6 per cent in Q1, followed by a 0.9 per cent decline in Q2. The good news? Downturns also provide plenty of opportunities for regular people to build wealth. Our content partner MoneyWise offers some tips on how to invest during a downturn.

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Today’s Posthaste was written by Gigi Suhanic (@gsuhanic), with additional reporting from The Canadian Press, Thomson Reuters and Bloomberg.

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