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'Structural factors' driving shelter inflation as BoC faces communication challenge



Canada's inflation landscape is undergoing a fundamental shift, with structural factors related to housing emerging as a significant hurdle for the Bank of Canada's (BoC) inflationary goals. James Orlando, the director and senior economist at TD Economics, argues that the current inflationary woes are primarily rooted in the housing sector.


Orlando's recent report highlights a startling fact: more than half of Canada's overall inflation can be attributed to shelter inflation, making it the "single biggest factor" impeding the BoC from reaching its two per cent inflation target. He emphasizes that mortgage interest costs are surging at an unprecedented pace, accompanied by soaring rents and low vacancies, resulting in shelter inflation reaching 6.2 per cent year-on-year. This component alone, constituting 30 per cent of the Consumer Price Index (CPI) basket, has accounted for over half of the country's inflation.


In a BNN Bloomberg interview, Orlando delves into the structural nature of Canada's housing challenges. The country's remarkable population growth, coupled with a shortage of housing supply, has led to record-low vacancy rates, fueling rent inflation due to a persistent supply-demand imbalance. Orlando questions the efficacy of the BoC's potential rate cuts in rectifying this structural issue, asserting that numerous factors are at play, and the root causes of shelter inflation may persist for an extended period.


Statistics Canada's recent report indicates a slight slowdown in the annual inflation rate to 2.9 per cent, down from 3.4 per cent the previous month. Tu Nguyen of RSM Canada notes that excluding shelter, inflation drops to 1.5 per cent, suggesting that monetary policy has effectively played its role.


Orlando suggests that the BoC should shift its focus away from shelter inflation to gain a more accurate understanding of the overall inflationary landscape. He argues that as long as the BoC relies on metrics influenced by shelter inflation, Canadians will continue to grapple with high-interest rates.


Despite calls for a change in approach, Orlando observes from recent BoC communications that the central bank seems reluctant to evaluate the inflationary scenario without considering the impact of shelter inflation. His report indicates that even if the BoC were to expedite rate cuts, the impact on cooling shelter prices would be minimal, highlighting the complexity of the issue.


The persistence of shelter inflation poses a communication challenge for the BoC, as Orlando contends that it is likely to remain elevated throughout the year. He raises a crucial question about whether the central bank, fixated on shelter inflation, should consider interest rate cuts. Orlando suggests that if the BoC looks beyond the immediate impact of rising shelter costs, it would find inflation under control.


In conclusion, the Canadian housing crisis, characterized by rising shelter costs and a structural imbalance in supply and demand, is exerting substantial pressure on the BoC's inflation targets. The central bank faces a communication challenge as it grapples with the implications of shelter inflation on the broader economic landscape. Addressing this issue may require a nuanced approach that acknowledges the persistence of shelter inflation while outlining a strategic plan to guide monetary policy effectively.


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