The question is, would central bank tightening reduce this kind of inflation. I doubt it. Instead, we are likely to see these pressures ease over time (see chart below). The problem is we have repeatedly underestimated the time it would take to work this all out, leading some to call for a quicker response by the Bank of Canada and the Fed, among other central banks, for fear that the inflation will become embedded.

Embedded inflation, caused by rising wages and inflation expectations, led to wage-price spiralling in the 1970s and early 1980s. In Canada, inflation remained high well into the early 1990s because of substantial federal and provincial budgetary spending. I do not believe we are anywhere near that reality today. To be sure, fiscal policy in response to the pandemic has generated extraordinary budgetary red ink, but price pressures today are not the result of budgetary actions.

Market-driven interest rates have already surged and are reflected in the rise in fixed mortgage rates. Maintaining a steady overnight rate at its effective lower bound has kept the prime rate and variable mortgage rates stable at extremely low levels. Undoubtedly, these rates will rise in time. The Bank of Canada has been clear that it will occur soon than they initially thought. They are nervous about inflation and are now saying a return to the 2% target will not happen until the end of next year.

Just this week, senior leadership at the Bank has taken to the news waves to suggest we are getting closer to full employment. Traders are now betting that the overnight rate target will rise 1.5 percentage points in 2022, beginning in April. Rates will increase, but we are not on the precipice of runaway inflation.

The actual (not seasonally adjusted) number of transactions in October 2021 was down 11.5% on a year-over-year basis from the record for that month set last year. That said, it was still the second-highest ever October sales figure by a sizeable margin.

On a year-to-date basis, some 581,275 residential properties traded hands via Canadian MLS® Systems from January to October 2021, surpassing the annual record of 552,423 sales for all of 2020.

“2021 continues to surprise. Sales beat last year’s annual record by about Thanksgiving weekend, so that was always a lock, but I don’t think too many observers would have guessed the monthly trend would be moving up again heading into 2022,” said Shaun Cathcart, CREA’s Senior Economist. “A month with more new listings is what allows for more sales because those listings are mostly all still getting gobbled up; however, with demand that strong, the supply of homes for sale at any given point in time continues to shrink. It is at its lowest point on record right now, which is why it’s not surprising prices are also re-accelerating. We need to build more housing.”

The basic story hasn’t changed, even with the rise in fixed mortgage rates: Housing demand remains well more than supply. Inventories of unsold properties are at historic lows. While the Trudeau government promised to address the massive supply shortage, in reality, housing construction is under the auspices of provincial and local government planning and zoning bodies. Moreover, the resurgence of immigration will widen the excess demand gap for homes to buy or rent. 

As of October, about two-thirds of local markets were seller’s markets based on the sales-to-new listings ratio is more than one standard deviation above its long-term mean. The sales-to-new listings ratio tightened again last month to 79.5% compared to 75.5% in September and 73.5% in August. The long-term average for the national sales-to-new listings ratio is 54.8% (see chart below).

There were just 1.9 months of inventory on a national basis at the end of October 2021, down almost half a month from three months earlier and back in line with the all-time lows recorded in February and March of this year. The long-term average for this measure is more than five months.

The non-seasonally adjusted Aggregate Composite MLS® HPI was up 23.4% on a year-over-year basis in October, a more significant gain than in the three previous months.

Year-over-year price growth in B.C. has crept back above 20%, though it is lower in Vancouver, on par with the 20% provincial gain in Victoria, and higher in other parts of the province.

Year-over-year price gains are in the mid-to-high single digits in Alberta and Saskatchewan, while they are currently at about 10% in Manitoba.

Ontario saw year-over-year price growth closing in on 30% in October, with GTA surging forward. Greater Montreal’s year-over-year price growth remains at a little over 20%, while Quebec City is now at 13%.

Price growth is running a little above 30% in New Brunswick (a little higher in Greater Moncton, a little lower in Fredericton and Saint John), while Newfoundland and Labrador is now at 10% year-over-year (a bit lower in St. John’s).

Canada continues to contend with one of the developed world’s most severe housing shortages. As our borders open to a resurgence of immigration, excess demand for housing will mount. The impediments to a rapid rise in housing supply, both for rent and purchase, are primarily in the planning and approvals process at the municipal level. Liberal Party election promises do not address these issues.

Inflation pressures are mounting everywhere. The US just posted a year-over-year inflation rate for October at 6.2%–higher than expected. This Wednesday, Canada’s CPI data will be released. We saw a y/y inflation rate of 4.4% in September. Undoubtedly, the October data will surpass that level. Maybe that is why Tiff Macklem wrote an op-ed in the Financial Times today reiterating that the Bank of Canada is getting closer to raising interest rates as slack in the economy dissipates. This is in line with the hawkish BoC policy statement last month.

“For the policy interest rate, our forward guidance has been clear that we will not raise interest rates until economic slack is absorbed,” Macklem wrote. “We are not there yet, but we are getting closer.”

According to Bloomberg News, Macklem reiterated that the Bank of Canada’s view is still that recent inflationary pressures will ease. Yet, he acknowledged that a high level of uncertainty remains. “Supply disruptions appear to be lasting longer than we thought, and energy price increases are adding to current inflation rates,” he wrote.

“While our analysis continues to indicate that these pressures will ease, we have taken them into account for the dynamics of supply and demand,” Macklem said. “What our resolve does mean is that if we end up being wrong about the persistence of inflationary pressures and how much slack remains in the economy, we will adjust.”

Employment rose by 31,200 (+0.2%) in October, following a jump of 157,000 the month before. Indeed, job growth surged at an average monthly rate of 143,000 from June through September. That is not a sustainable pace of job gains but rather a reflection of the spike in hiring in the immediate aftermath of the lockdown. For example, hiring averaged 23,000 per month in the two years before the outbreak of COVID.

Employment increases in several industries, including retail trade, were offset by declines elsewhere, including accommodation and food services. Employment rose in Ontario and New Brunswick, while it fell in Manitoba and Saskatchewan. Declines in self-employment offset Gains among paid employees.The number of employed people working less than half their usual hours fell 9.7% (-100,000) in October and remained 117,000 higher (+14.5%) than in February 2020. Total hours worked were up 1.0% in October and were 0.6% below their pre-pandemic level.

Among people of core working age (25 to 54 years), employment rose by 53,000 (+0.4%) in October, with all the gains in full-time work.

Long-term unemployment—the number of people continuously unemployed for 27 weeks or more—was little changed in October, at 378,000, but down from its most recent peak of 486,000 in April 2021. Among people who were in long-term unemployment in September, 15.2% had found employment in October, slightly higher than the average of 11.6% observed from 2017 to 2019.

The labour force participation rate—the share of the population working or searching for work—fell by 0.2 percentage points to 65.3% in October, as fewer youth aged 15 to 24 searching for work. The size of the October decrease is consistent with typical monthly variations observed prior to the COVID-19 pandemic. The overall participation rate in October was virtually the same as the pre-pandemic rate of 65.5% observed in February 2020.

This rebound in Canada’s labour force participation rate contrasts with trends observed in the United States, where participation has recovered less quickly. When Canadian data are adjusted to US concepts, Canada’s participation rate was 65.1% in September 2021, 0.3 percentage points below its February 2020 level. In the United States, the September labour force participation rate was 1.7 percentage points below its pre-pandemic level.

Today’s employment data confirm that the Canadian economy is moving closer to full employment and may well hit the zero-output-gap threshold in the middle quarters of 2022, as the Bank of Canada suggested at their most recent policy meeting. The bulk of the gains in hiring were in the hard-hit retail sector, which returned to pre-pandemic levels last month. All of the gains were in full-time employment and average wages for permanent workers were 2.1% y/y. Wages gains are still relatively modest, supporting the Bank of Canada’s view that inflation pressures will dissipate by the end of next year.

Employment is now a bit above levels in February 2020. This is a historically rapid rebound from the massive job losses in the immediate wake of the first pandemic lockdowns.

• The Canadian economy has accelerated robustly in the second half.
• Labour markets have improved, especially in the hard-to-distance sectors. Despite continuing slack, many businesses can’t find appropriate workers quickly enough to meet demand.
• Disruptions to global supply chains have worsened, limiting production and leading to both higher costs and higher prices.
• The output gap is narrower than projected in July. The Bank now expects slack to be absorbed in Q2 or Q3 of next year, one quarter sooner than earlier projected.
• Given persistent supply constraints and the increase in energy prices, the Bank expects inflation to stay above the control range for longer than previously anticipated before easing back to close to the 2 percent target by late 2022.
• The Bank views the risks around this inflation outlook as roughly balanced.

In response to the Bank’s revised view, it announced that it is ending quantitative easing, shifting to the reinvestment phase, during which it will purchase Government of Canada bonds solely to replace maturing bonds. The Bank now owns about 45% of all outstanding GoC bonds.

The Bank today held its target for the overnight rate at the effective lower bound of 1/4 percent. While this was widely expected, the Bank adjusted its forward guidance. It moved up its guidance for the first hike in the overnight rate target by three months, from the second half of 2022 to the middle quarters–sometime between April and September.

The Bank believes the surge in inflation is transitory, but that does not mean it will be brief. CPI inflation was 4.4% y/y in September and is expected to rise and average around 4.75% over the remainder of this year. Macklem now believes inflation will remain above the Bank’s 1%-to-3% target band until late next year.

There is also a good deal of uncertainty about the size of the slack in the economy. This is always hard to measure, especially now when unemployment remains elevated at 6.9%, while sectors such as restaurants and retail are fraught with labour shortages. Structural changes in the labour force are afoot. Many former restaurant employees have moved on or are reluctant to return to jobs where virus contagion risks and poor working conditions. There was also a surge in early retirements during the pandemic and a dearth of new immigrants.

Concerning housing, the MPR says the following: “Housing market activity is anticipated to remain elevated over 2022 and 2023 after having moderated from recent record-high levels. Increased immigration, solid income levels and favourable financing conditions will support ongoing strength. New construction will add to the supply of houses and should help soften house price growth”.

The monthly CPI rose 0.2% in September, at the same pace as in the prior month. Month-over-month CPI growth has been positive for nine consecutive months.

Today’s inflation is a global phenomenon–prices are rising everywhere, primarily due to the interplay between global supply disruptions and extreme weather conditions. Inflation in the US is the highest in the G7 (see chart below). The economy there rebounded earlier than elsewhere in the wake of easier Covid restrictions and more significant markups.

Central banks generally agree that the surge in inflation above the 2% target levels is transitory, but all now recognize that transitory can last a long time. Bank of Canada Governor Tiff Macklem acknowledged that supply chain disruptions are “dragging on” and said last week high inflation readings could “take a little longer to come back down.”

Gasoline prices fell 0.1% month over month in September, as uncertainty about global oil demand continued following the spread of the COVID-19 Delta variant (see charts below).

Today’s CPI release was the last significant economic indicator before the Bank of Canada meeting next Wednesday, October 27. While no one expects the Bank of Canada to hike overnight rates next week, market-driven interest rates are up sharply (see charts below). Fixed mortgage rates are edging higher with the rise in 5-year Government of Canada bond yields. The right-hand chart below shows the yield curve today compared to one year ago. The curve is hinged at the steady 25 basis point overnight rate set by the BoC, but the chart shows that the yield curve has steepened sharply with the rise in market-determined longer-term interest rates.

Moreover, several market pundits on Bay Street call for the Bank of Canada to hike the overnight rate sooner than the Bank’s guidance suggests–the second half of next year. Traders are now betting that the Bank will begin to hike rates early next year. The overnight swaps market is currently pricing in three hikes in Canada by the end of 2022, which would bring the policy rate to 1.0%. Remember, they can be wrong. Given the global nature of the inflation pressures, it’s hard to imagine what tighter monetary policy in Canada could do to reduce these price pressures. The only thing it would accomplish is to slow economic activity in Canada vis-a-vis the rest of the world, particularly if the US Federal Reserve sticks to its plan to wait until 2023 to start hiking rates.

It is expected that the Bank will taper its bond-buying program once again to $1 billion, from the current pace of $2 billion.

The Bank will release its economic forecast next week in the Monetary Policy Report. It will need to raise Q3 inflation to 4.1% from its prior forecast of 3.9%.

“September provided another month’s worth of evidence from all across Canada that housing market conditions are stabilizing near current levels,” said Cliff Stevenson, Chair of CREA. “In some ways that comes as a relief given the volatility of the last year-and-a-half, but the issue is that demand/supply conditions are stabilizing in a place that very few people are happy about. There is still a lot of demand chasing an increasingly scarce number of listings, so this market remains very challenging.”

Housing supply remains a major constraint, forcing many buyers to either pay up for scarce properties or to remain on the sidelines. This is particularly troublesome for first-time homebuyers as mortgage rates are coming under renewed upward pressure as inflation concerns have forced yield curves to steepen and longer-term bond yields to rise worldwide.

With sales up and new listings down in September, the sales-to-new listings ratio tightened to 75.1% compared to 73.2% in August. The long-term average for the national sales-to-new listings ratio is 54.8%.

Based on a comparison of sales-to-new listings ratio with long-term averages, a small but growing majority of local markets are moving back into seller’s market territory (see chart below). As of September, it was close to a 60/40 split between seller’s and balanced markets.

There were 2.1 months of inventory on a national basis at the end of September 2021, down slightly from 2.2 months in August and 2.3 months in June and July. This is extremely low and indicative of a strong seller’s market at the national level and in most local markets. The long-term average for this measure is more than 5 months.

The non-seasonally adjusted Aggregate Composite MLS® HPI was up 21.5% on a year-over-year basis in September, up a bit from the 21.3% year-over-year gain recorded in August.

Looking across the country, year-over-year price growth is creeping up above 20% in B.C., though it is lower in Vancouver (13.9%), on par with the provincial number in Victoria, and higher in other parts of the province (see table below).

Year-over-year price gains are in the mid-to-high single digits in Alberta and Saskatchewan, while gains are into the low double digits in Manitoba.

Ontario saw year-over-year price growth pushing 25% in September; however–as with B.C.–big, medium and smaller city trends, gains are notably lower in the GTA (19.0%) and Ottawa (16.4%), around the provincial average in Oakville-Milton (26.9%), Hamilton-Burlington (26.5%) and Guelph (26.4%), and considerably higher in many of the smaller markets around the province.

Greater Montreal’s year-over-year price growth remains at a little over 20%, while Quebec City is now at 12.7%. Price growth is running a little above 30% in New Brunswick (higher in Greater Moncton, a little lower in Fredericton and Saint John), while Newfoundland and Labrador is now at 12% year-over-year (a bit lower in St. John’s).

Canada continues to contend with one of the developed world’s most severe housing shortages. As our borders open to a resurgence of immigration, excess demand for housing will mount. The impediments to a rapid rise in housing supply, both for rent and purchase, are primarily in the planning and approvals process at the municipal level. Liberal Party election promises do not address these issues.

It is noteworthy that while Canada suffers one of the most acute housing shortages, housing affordability is getting worse in many OECD countries (see chart below).

Some of the inflation is coming from disruptions on the supply side emanating from COVID-related disruptions, which may work themselves out in time. However, they’re still getting worse, and many suggest the timeline could be much longer than just this year. In addition, extreme weather events and climate change initiatives–both of which are more or less permanent–have also boosted inflation pressure. Consumer demand for goods and housing and business capital expenditures have surged in the face of labour shortages. Wage rates are beginning to rise. All of this has raised prices spilling into next year. Higher interest rates are likely sustainable even though the Bank of Canada and the Federal Reserve will likely hold overnight rates steady for the next year (see charts below).