Higher Real Estate prices, interest rates just around the corner
Higher prices, interest rates just around the corner
PATRICIA CROFT
Globe and Mail Blog
Posted on Tuesday, March 22, 2011 6:47AM EDT
Patti Croft is recently retired as chief economist, RBC Global Asset Management, with 30 years of experience on Bay Street working as an economist and global asset allocation strategist.
I suspect many Canadians reacted with disbelief to last week’s inflation report for the month of February, which showed that our core or underlying rate of inflation fell to a record low of just 0.9 per cent, the lowest since record keeping began in 1985. In addition, the overall rate of inflation dipped slightly to 2.2 per cent.
When filling up the car or going to the grocery store, it’s hard to believe inflation in Canada is that benign.
Indeed, Canada is totally out of step with emerging market economies such as China, India and Brazil, all struggling to rein in soaring inflation largely related to food prices. China has stated that curbing inflation is its top priority in 2011.
Globally, food prices have come under significant pressure over the past year. The United Nation’s food price index is up 40 per cent since June, 2010 ,and stands at a record high (the index started in 1990). Food price inflation is a major issue for emerging market economies where a significant proportion of the cost of living is attributable to the cost of food – in China and India, the weight of food in the basket of consumer goods and services that is used to calculate the level of inflation is 35 per cent or higher.
In contrast in Canada, the weight of food in the CPI is 17 per cent - no small potatoes. In February, food prices in Canada climbed just 2.1 per cent from year-ago levels, despite droughts in China and floods in Australia and instances of global hoarding.
So far Canada has been insulated from rising food prices by strong competition and the strength of the Canadian dollar. But with a lag, food price inflation is coming to Canada as well. Recently, George Weston announced a 5 per cent hike in prices, effective April 1, and Starbucks instituted a 12 per cent increase in packaged coffee. Retailers are beginning to feel the pressure of higher prices and are passing this along to consumers.
The lag between soaring oil prices and the impact at the gas pump or the airport appears to be shorter. Canadians are already feeling the pinch of soaring gas prices and transportation costs are rising as higher energy costs are passed along. Indeed, in February, Canadian energy prices rose almost 11 per cent year over year with gas prices up almost 16 per cent.
The outlook for inflation is critically linked to the outlook for interest rates. Two-year bond yields give an idea of where the market thinks interest rates are headed. Two year government of Canada bond yields have tumbled from 1.9 per cent in February to just 1.6 per cent last week. The market is currently pricing in just 35 basis points of tightening from the Bank of Canada by the end of this year, with no change in rates until October.
The drop in the core rate of inflation in February was more a reflection of the drop from the index of the spike in Olympic related hotel costs from a year ago (to be reversed in March) rather than the lack of inflationary pressures in Canada. While we will remain out of step with emerging markets regarding the immediacy of the need to strongly deal with inflation, Canadians should brace themselves for both a rise in inflation and an increase in interest rates well before October – a summer rate hike seems far more likely.
Full article- Globe and MAIL
PATRICIA CROFT
Globe and Mail Blog
Posted on Tuesday, March 22, 2011 6:47AM EDT
Patti Croft is recently retired as chief economist, RBC Global Asset Management, with 30 years of experience on Bay Street working as an economist and global asset allocation strategist.
I suspect many Canadians reacted with disbelief to last week’s inflation report for the month of February, which showed that our core or underlying rate of inflation fell to a record low of just 0.9 per cent, the lowest since record keeping began in 1985. In addition, the overall rate of inflation dipped slightly to 2.2 per cent.
When filling up the car or going to the grocery store, it’s hard to believe inflation in Canada is that benign.
Indeed, Canada is totally out of step with emerging market economies such as China, India and Brazil, all struggling to rein in soaring inflation largely related to food prices. China has stated that curbing inflation is its top priority in 2011.
Globally, food prices have come under significant pressure over the past year. The United Nation’s food price index is up 40 per cent since June, 2010 ,and stands at a record high (the index started in 1990). Food price inflation is a major issue for emerging market economies where a significant proportion of the cost of living is attributable to the cost of food – in China and India, the weight of food in the basket of consumer goods and services that is used to calculate the level of inflation is 35 per cent or higher.
In contrast in Canada, the weight of food in the CPI is 17 per cent - no small potatoes. In February, food prices in Canada climbed just 2.1 per cent from year-ago levels, despite droughts in China and floods in Australia and instances of global hoarding.
So far Canada has been insulated from rising food prices by strong competition and the strength of the Canadian dollar. But with a lag, food price inflation is coming to Canada as well. Recently, George Weston announced a 5 per cent hike in prices, effective April 1, and Starbucks instituted a 12 per cent increase in packaged coffee. Retailers are beginning to feel the pressure of higher prices and are passing this along to consumers.
The lag between soaring oil prices and the impact at the gas pump or the airport appears to be shorter. Canadians are already feeling the pinch of soaring gas prices and transportation costs are rising as higher energy costs are passed along. Indeed, in February, Canadian energy prices rose almost 11 per cent year over year with gas prices up almost 16 per cent.
The outlook for inflation is critically linked to the outlook for interest rates. Two-year bond yields give an idea of where the market thinks interest rates are headed. Two year government of Canada bond yields have tumbled from 1.9 per cent in February to just 1.6 per cent last week. The market is currently pricing in just 35 basis points of tightening from the Bank of Canada by the end of this year, with no change in rates until October.
The drop in the core rate of inflation in February was more a reflection of the drop from the index of the spike in Olympic related hotel costs from a year ago (to be reversed in March) rather than the lack of inflationary pressures in Canada. While we will remain out of step with emerging markets regarding the immediacy of the need to strongly deal with inflation, Canadians should brace themselves for both a rise in inflation and an increase in interest rates well before October – a summer rate hike seems far more likely.
Full article- Globe and MAIL
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