Some senior economists say inflation has peaked in Canada, with gas and housing prices on the decline, and food prices soon to follow. But they also warn of turbulence ahead for the country’s fragile economy.

In its latest Monetary Policy Report, the Bank of Canada predicted inflation will hover around 8% in the second and third quarters of 2022, before falling to 3% by the end of 2023 and returning to the target rate of 2% by the end of the following year.

Statistics Canada has reported inflation rose to 8.1% year-over-year in June — the largest increase in nearly four decades, but below analysts’ expectations.

Avery Shenfeld, chief economist at CIBC, predicts the July and August inflation numbers will also be a few tenths of a point below the central bank’s forecast from earlier in the summer.

Canada’s largest grocer, Loblaw Companies Ltd., said there are signs inflation has peaked or will soon, with expectations inflation will decrease in the second half of the year. “Commodity prices are coming off their highs, some freight costs are coming down and supply chain issues are normalizing — other than fuel costs, which remain high but down from their peaks of last March,” said Loblaw chief financial officer Richard Dufresne during a call with investors Wednesday.

Shenfeld says the cost of gasoline is one of the primary commodities bending the inflation numbers. “We do know that gasoline prices have come down and they’ve been a big contributor to inflation,” he said.

Canada’s housing market, which feeds into several components of the consumer price index, has also cooled. The yearly homeowners’ replacement cost index, related to new home prices, slowed year-over-year in June (10.0%) compared with May (11.1%).

In a report published July 22, Douglas Porter, chief economist and managing director of BMO Financial Group, wrote there are a “variety of encouraging signs that inflation may be at an inflection point.” However, the BMO economist is not ready to say the worst of inflation is behind us. “I think at the very least it’s stopped accelerating,” Porter said. “But I do think we have to be humble and cautious when we make bold calls on inflation in this environment because — let’s face it — a lot of people have gotten things very wrong in the last 18 months.”

Porter’s concern is there could be another inflation peak at the end of 2022 before numbers start to decline “more meaningfully” in 2023. There’s the possibility of another “big lurch” in energy prices due to the current volatility in commodity prices.

While Royce Mendes, managing director and head of macro strategy at Desjardins, is “cautiously optimistic” inflation has peaked, he also noted there are many factors that could disrupt the downward trend. “The clearest example of that is the war in Ukraine and its potential effects on the food and energy crisis,” he said.

But the biggest question for Mendes, is not whether inflation has peaked, but rather if it will return to the target rate of 2%. “Even if peak inflation is in the rear-view mirror, but we settle at 4% inflation, it’s still a problem. It’s certainly no time to say that this is mission accomplished by any means.”

Though the Bank of Canada has a mandate to bring inflation down to 2%, inside a control range of 1% to 3%, Mendes said it is possible for the consumer price index to level off above that target due to the “unsustainably tight” labour market. “Many businesses are looking for workers, but cannot find them,” he said. “That’s going to drive up wages, which will feed back into consumer prices.”

If inflation stagnates above the target range set by the central bank, Canadians could gradually become worse off, Mendes said, as their savings and purchasing power erodes.

The Bank of Canada warned that entrenched high inflation will require even higher interest rates to restore price stability, leading to a weaker economy. The central bank will try to avoid that by continuing to hike interest rates “fairly aggressively” over the next few months, even though inflation numbers are plateauing, said Nathan Janzen, assistant chief economist at RBC Economics Research.

The bank’s next three scheduled interest rate announcements are on Sept. 7, Oct. 26 and Dec. 7. Most economists agree the September hike to the overnight rate will either be half or three-quarters of a percentage point. Earlier in July, the bank increased its key interest rate by a full percentage point to 2.5%. The Bank of Canada said it considers interest rates of 2% to 3% within its “neutral range.”

David Macdonald, senior economist at the Canadian Centre for Policy Alternatives, said the next rate hike announcement will show how seriously the bank intends to fight inflation. Though the bank intends to create a “soft landing” — to rein in inflation without a recession — Macdonald notes there is little historical precedent for that and a recession is likely. “We’ve never gotten inflation down by the amount that we would need without a recession in modern Canadian history.”

Source: The Star