It is easier for the US CPI-U to show a big decline in a single month because mortgage interest costs are not included in, which would have been pushed up in recent months by the dramatic increases in the federal funds rate. This is an advantage not possessed by the Canadian CPI, which is the only inflation measure targeted by any G20 central bank that includes mortgage interest. I told our Finance Minister to make the CPI excluding mortgage interest the target inflation indicator of the Bank of Canada with the 2021 renewal of the inflation-control agreement but she not only didn’t do that, she didn’t even have the basic decency to respond to my e-mail.
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This report ignores the contrast between this disappointing jobs report and the unexpectedly strong US jobs report. The US unemployment rate fell from 3.6% to 3.5%. Unfortunately, StatCan only publishes an unemployment rate series comparable to the US rate that is not seasonally adjusted (R3). While this rate went from 3.7% in June to 4.1% in July the US unemployment rate prior to seasonal adjustment stayed unchanged at 3.8%, and an unusual lower rate for Canada was replaced by a more usual higher rate, by 0.3 percentage points. The participation rate fell in both countries, but it dropped by 0.1 percentage points in the US, by 0.2 percentage points in Canada.
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The headline was all wrong for this story. It should have been that there was a loss of 64 thousand employee jobs from June to July, a 0.4% decrease. The total employment loss was only 31 thousand simply because there was a big gain in self-employed jobs. Shifts in this category are often meaningless, and as a category self-employed jobs offer low and precarious incomes. There was no discussion at all of employment by class of worker in the story, which seemed to be geared to putting the best light possible on an unsettling report.
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StatCan reported: "The mortgage interest cost index continued to decrease at a slower pace on a year-over-year basis, down 0.6% in June following a 2.7% decline in May, putting upward pressure on the all-items CPI. This was driven by the largest month-over-month increase (+1.4%) since September 1982." This was of course, in large part due to the Bank of Canada interest rate hikes aimed to curb inflation. It is dysfunctional for the Bank of Canada to target an inflation measure that includes mortgage interest cost. No other G20 central bank does so. I sent Finance Minister Freeland a recommendation last year that a CPI excluding mortgage interest should be made the target inflation indicator with the 2021 renewal agreement and mortgage interest removed from the operational guide as well. I never received a response and the Bank's inflation measures remain as dysfunctional as before.
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CIBC senior economist Karyne Charbonneau said the headline reading for inflation was lower than expected and called it the "first negative surprise on inflation in many months." The Bank of Canada projected an annual inflation rate of 7.6% for 2022Q2. The actual inflation rate was 7.5%. Big deal. It was still the highest four-quarter inflation rate going back to February 1983, or, if one looks at the true rate of inflation, going back to January 1983. If one looks at the 12-month inflation rate, the 8.1% increase was the greatest true inflation increase (assumed to be 7.8%) since December 1982 (assumed to be 8.8%). The Bank of Canada said at the time of the 2016 renewal agreement that henceforth one should deduct 0.3% from an official inflation rate rather than 0.5% to get an estimate of the true inflation rate.
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This was the biggest hike in the overnight rate since August 27, 1998, when Jean Chrétien was PM and Gordon Thiessen was the Governor of the Bank of Canada. Of the nine members of the C.D. Howe Institute’s Monetary Policy Council, only one, UQAM professor Steve Ambler, recommended a 100 basis point hike to 2.5%. Since he seems to have the ear of the Governing Council of the Bank of Canada, it is worth noting that Ambler also calls for a hike to 3.0% with the next interest rate announcement on September 7. This would bring the overnight rate to the top of the 2% to 3% range the Bank of Canada defines for a neutral rate. At 2.5%, it is now at the middle of that range. Until today, the overnight rate has never been higher than 1.75% since the 2008-09 recession. This is the highest level the overnight rate since it was at 3.0% in October 2008, before dropping to 2.25% in November.
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Craig writes: “Nathan Janzen said the Bank of Canada is concerned that longer-run inflation expectations could come unhinged, making it more difficult to bring inflation back to target. “ But the update for the Canadian Survey of Consumer Expectations showed that they have already come unhinged, didn’t it? In particular the one-year and two-year ahead consumer expectations recorded their highest readings ever, at 6.82% and 5.02% respectively. That’s nowhere close even to the 3% upper bound, let alone the 2% target. It looks like the Bank of Canada will only be able to meet its 2% target within a reasonable time span by causing a recession, with massive unemployment, ignoring their new commitment to maximum employment. It’s a problem that it created for itself. It didn’t have to have to adopt a new policy framework to get out of the pandemic recession, embracing the same average-inflation targeting framework as the US Fed, providing more stimulus than necessary in 2021.
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Based on the preliminary estimate, in May 2022, real GDP per member of the active population would still be 0.5% lower than it was in February 2020, the peak month before the recession started. It seems likely that the 1.5% projected estimate the Bank of Canada made for real GDP growth in 2022Q2 was an overestimate. BMO is projecting 1% growth for the quarter, which is still quite good. The Bank of Canada may still go ahead with a 75 basis points increase later this month. They have revised the neutral range for the overnight rate to be 2% to 3%, so even if the overnight rate were pushed up to 1.75% it would still be below the lower bound of that neutral range.
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The average of the three core inflation measures that define the Bank of Canada’s operational guide rose to 4.73% in May. CPI-common, at 3.9%, was much lower than the other two, due to its high correlation with the mortgage interest cost component. The previous operational guide, CPIX, which the Liberal government removed as the operational guide with the 2016 renewal of the inflation-control agreement, excluded mortgage interest cost, and shows a much higher inflation rate, 6.1%. Since then. the Bank of Canada is the only central bank in the world whose preferred core inflation measure is sensitive to mortgage rate changes. Bizarrely, there was no basket share for the new 2021 CPI basket that took effect with the May update, although the CPIX measure was updated, as both a raw and a seasonally adjusted series. If CPIX ceased to be published, it would certainly show contempt for the Canadian public’s right to know. CPIXFET, the original operational guide, has never been terminated.
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The US CPI-U is an inferior inflation measure to the chained CPI (C-CPI-U) which showed inflation going from 8.4% in June to 8.0% in July. Canada should have its own chained CPI, which would virtually eliminate upper-level substitution bias from measured inflation and always show a lower inflation rate than the existing CPI. Again, not something we can expect to see happen with Chrystia Freeland as Finance Minister, a woman who compares Canadian 12-month inflation rates with New Zealand four-quarter inflation rates, which is comparing apples with oranges.
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