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Economist says shelter costs driving inflation, urges BoC to focus on different metrics



Canadian economist James Orlando has called for a shift in the way the Bank of Canada evaluates inflation, emphasizing that the current inflationary challenges are predominantly rooted in the housing sector. Orlando, who serves as the Director and Senior Economist at TD Economics, released a report highlighting that more than 50% of Canada's overall inflation is attributed to shelter inflation, presenting a major obstacle to the central bank's target of a two percent inflation rate.


The report, issued on Tuesday, underscores the alarming surge in mortgage interest costs, marking the fastest pace of increase on record. Simultaneously, rents have skyrocketed, exacerbated by low vacancy rates. Orlando points out that this surge has propelled shelter inflation to 6.2% year-on-year, making it a significant driver of the country's inflationary trends. Given its substantial 30% weight within the Consumer Price Index (CPI) basket, shelter inflation alone accounts for over half of the total inflation experienced in Canada.


Statistics Canada, in its latest report on Tuesday, revealed a slowdown in the country's annual inflation rate to 2.9%, a decrease from the 3.4% recorded a month earlier.


Tu Nguyen, an economist with RSM Canada, emphasized in a statement that excluding shelter costs, inflation drops significantly to 1.5%. Nguyen suggested that monetary policy has effectively fulfilled its role.


Orlando argues that due to the substantial impact of shelter prices on inflation data, the Bank of Canada should reassess its focus on shelter inflation, as previous approaches have done. He warns that as long as the central bank continues to prioritize metrics influenced by shelter inflation, Canadians will continue to bear the burden of elevated interest rates.


Despite recent indications from the Bank of Canada, Orlando observes that the central bank is not prepared to analyze the inflationary landscape independently of shelter inflation's impact. He highlights that even if the bank swiftly reduces interest rates, shelter inflation will maintain its disproportionate influence.


The report also examines the potential effectiveness of rate cuts in curbing shelter inflation. Orlando concludes that the Bank of Canada would have limited capacity to mitigate the surging prices in the housing sector.


Orlando suggests that a reliable measure of inflation should accurately reflect economic trends without being skewed by a single sector. He questions the efficacy of the Bank of Canada's three core measures, arguing that they fail to adequately guide monetary policy due to their reduced connection with the economic cycle amid structural challenges in Canada's housing market.


As the Canadian economy faces stagnation since the previous spring, Orlando urges a reevaluation of the core metrics to ensure they align more closely with broader economic trends, providing a more effective guide for the Bank of Canada's monetary policy decisions.


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