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Posthaste: Sorry Canada, this kind of inflation is sticking around — and it's huge Back to video

There is one inflation problem in this country that isn’t going away anytime soon, and even the Bank of Canada admits it.

Shelter costs, which include mortgage interest and rent, are going to be the single biggest driver of inflation for the foreseeable future, say economists.

The central bank acknowledged as much in its recent monetary policy report, saying “shelter price inflation is high and is expected to put upward pressure on inflation for some time.”

It is expected to contribute an average of 1.8 percentage points to overall inflation throughout this year, almost four times the average in the five years before the pandemic, said Desjardins economist Randall Bartlett.

Rising mortgage interest costs are the biggest driver. The pace of this inflation set records in 2023, averaging 30 per cent year over year in the second half. Bartlett said this trend will continue in 2024 as mortgages renew under higher interest rates. 

Rents too have been growing at a rapid pace.

The average rent for a two-bedroom apartment rose 8 per cent in the 12 months to October 2023, beating both the inflation rate of 3.1 per cent and wage growth of 4.8 per cent over the same period, said RBC economist Rachel Battaglia.

That was the fastest pace since 1990 and more than double the average rate in the five years before the pandemic.

With home construction lagging record population growth, there is little relief for renters in sight.

The national rental vacancy rate fell to a historic low of 1.5 per cent in 2023, the Canada Mortgage and Housing Corporation reported last week.

And based on the Bank of Canada’s latest forecast for population growth and housing investment, National Bank economists predict the rental vacancy rate will fall below 1 per cent by 2025 — “keeping rent inflation uncomfortably high for the 37 per cent of Canadian households that make up the renter population.”

So how does Canada get inflation back on track?

Prices for other things besides shelter will have to come down much further than in the past to get inflation back to the Bank of Canada’s target of 2 per cent — and it will likely take a “short and shallow” recession to do it, said Bartlett.

Desjardins expects that higher interest rates will continue to weigh on the economy and labour market, tipping the Canadian economy into recession in the first half of the year.

“It will need to, as non‑shelter core inflation … must come in sustainably below its pre‑pandemic pace to offset higher-for-longer core shelter inflation,” said Bartlett.

Inflation categories outside of shelter are already showing signs of cooling, he said. And with the unemployment rate expected to rise further, slower demand will make it harder for businesses to raise prices.

“All told, while shelter inflation is expected to remain elevated for the foreseeable future, other drivers of inflation are likely to offset that strength and help to bring inflation back to around 2 per cent by the end of 2024,” said Bartlett.

That doesn’t mean the Bank of Canada will wait until then to cut interest rates.

A recession and weak labour market should provide the central bank with the evidence it needs by the spring — well before headline inflation has touched down at the 2 per cent target,” he said.

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Fertility rates in advanced economies have been falling for decades, but the pandemic appears to have accelerated that trend, says BMO economist Shelly Kaushik.

Statistics Canada reported last week that the total fertility rate in this country hit a record low in 2022 at an average of 1.33 births per woman.

Lower fertility and the aging population are seen as risks to Canada’s long-term outlook and were part of the reason the federal government hiked immigration targets, she said.

• Deputy Prime Minister Chrystia Freeland will provide an update on the government’s economic plan. 
• Bank of Canada governor Tiff Macklem will give a speech on the effectiveness and limitations of monetary policy at the Montreal Council on Foreign Relations today. 
• Agriculture leaders and food experts will testify at a government hearing on food inflation in Ottawa. 
• Peter Routledge, superintendent of financial institutions, and Celyeste Power, president and CEO of the Insurance Bureau of Canada, will participate in a fireside chat at CatIQ’s Canadian Catastrophe Conference. 
• Today’s Data: Toronto home sales and prices, Canadian building permits, Ivey PMI data for Canada 
• Earnings: Precision Drilling, KKR, Eli Lilly, Frontier Airlines, Madison Square Garden Inc., Hertz, Chipotle, Dupont, Snap Inc., Algoma Steel, Ford Motor Co.

Get all of today’s top breaking stories as they happen with the Financial Post’s live news blog, highlighting the business headlines you need to know at a glance.

• ‘The wind just died down’: Lithium miners try to hold on as prices slump
• Retirement math you need to know, from how long you’ll live to deferring CPP
• Independent investors can find success by staying aware of how everything is connected

Having exposure to real estate has helped make most billionaires’ fortunes, but certified financial planner Allan Norman says that doesn’t mean it makes sense for everyone to buy real estate investment trusts just because they don’t own a house. What might make sense could surprise you. Find out more at FP Investing

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Are you worried about having enough for retirement? Do you need to adjust your portfolio? Are you wondering how to make ends meet? Drop us a line at aholloway@postmedia.com with your contact info and the general gist of your problem and we’ll try to find some experts to help you out while writing a Family Finance story about it (we’ll keep your name out of it, of course). If you have a simpler question, the crack team at FP Answers led by Julie Cazzin or one of our columnists can give it a shot.

McLister on mortgages

Flummoxed by the mortgage market? Robert McLister is here to help. Today, the Financial Post is launching a new column by the mortgage strategist that will help our readers navigate the complex sector, from the latest trends to complex financing opportunities they won’t want to miss. To kick it off, Rob runs down the 10 things he’ll be watching most closely this year, from the rate-cut waiting game to the rise of the six-month mortgage and more.

Read it here

Today’s Posthaste was written by Pamela Heaven, with additional reporting from Financial Post staff, The Canadian Press and Bloomberg.

Have a story idea, pitch, embargoed report, or a suggestion for this newsletter? Email us at posthaste@postmedia.com.

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