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Posthaste: Cheer up, Canadians might get relief from hot inflation sooner than they think

Fastest rise in inflation since 1951 could retreat almost as quickly, says economist

By Pamela Heaven

Faced with the hottest inflation in almost 40 years and rising interest rates — not to mention growing recession warnings — Canadians’ confidence is sinking.

The most recent reading by the Conference Board of Canada saw consumer confidence fall another 6.6 points in July, after dropping 8.8 points in June.

Inflation and affordability rank high among concerns, with optimism over current finances sinking to 11.4%. Those with a pessimistic view of their finances increased to 33.3%.

Yet economists are starting to see light at the end of this tunnel.

Canada’s latest inflation reading showed the consumer price index surging to 8.1% in June, the biggest increase year over year since January 1983.

But there were “encouraging signs” in the data, economists say.

For one thing the pace of inflation was less than the 8.4% that economists had expected, said Capital Economics’ Stephen Brown, who thinks inflation has finally peaked.

An average of the three core measures rose by only 0.1 percentage point, the smallest increase in eight months, he said.

As well, Capital’s own calculations show that the CPI-trim index rose by 0.3% month over month in June, not far from the 0.25% average necessary for core inflation to eventually drop back to within the Bank of Canada’s target range of 1% to 3% — albeit at the high end.

There are signs globally as well that inflation may be at an inflection point, said BMO chief economist Douglas Porter in a recent note.

Commodity prices have fallen almost 20% in the past six weeks, bringing them back to levels seen before the invasion of Ukraine.

Wholesale gas prices in the U.S. have dropped more than $1 a gallon, wiping out more than two-thirds of the Ukraine conflict spike. And grain prices are also dropping, with wheat futures down about 30%.

“Beyond those clear signals, there are a variety of more subtle signs that the tide may be turning,” wrote Porter.

Our ascent into high inflation has been a quick one. Just consider that a year ago in June 2021, inflation was 3%. Fast forward to June 2022 and it’s a 5.1- percentage-point leap — the fastest rise in inflation in a year since 1951, said Porter.

“Just as inflation has grown — literally — like a weed in the past year, it is entirely possible that it can retreat almost as quickly,” he wrote.

But the economist also warns that despite the encouraging signs, the next six months will likely continue to be challenging and we could see a second peak later this year before price pressures ease in earnest in 2023.

Nor will these signs turn the path of the Bank of Canada, said Capital Economics. The market is now pricing in about a 50/50 chance of either a 50 basis point or 75 bp hike at the Bank’s September meeting.

“We suspect the Bank will probably err toward raising interest rates into a lightly restrictive territory at the next meeting, to send a clear message that it remains intent on bringing down inflation despite the risks to the housing market,” wrote Brown.

Source : Financial Post