Hot core: Canada may need a recession to cool inflation

Hot core: Canada may need a recession to cool inflation

By Julie Gordon and Fergal Smith

OTTAWA (Reuters) – Fundamental pressures driving inflation in Canada are likely to peak in the fourth quarter of this year, economists told Reuters, although most see signs that rapid price hikes are becoming entrenched and warn that a recession may be necessary. To avoid a vortex.

Canadian inflation data for August will be released on Tuesday, with analysts expecting the headline rate to fall to 7.3% from 7.6% in July and a four-decade high of 8.1% in June.

But all eyes will be on the three primary measures of inflation – CPI Common, CPI Median and CPI Trim – which together are a better indicator of underlying price pressures. The average of the three hit a record high of 5.3 percent in July.

Six of the eight economists polled by Reuters see core inflation peaking in the fourth quarter as underlying domestic and global pressures begin to subside, although the path back to the 2% target will not be quick.

β€œThe rapid slowdown in growth, the decline in home prices and less pressure on supply chains will help curb core inflation relatively soon,” said Doug Porter, chief economist at BMO Capital Markets.

“However, we think it will be sticky, and only slowly decline through 2023,” he added.

Expanding price increases, rising wage adjustments and expectations of consumer and business inflation are indications that inflation is becoming more entrenched in the economy, economists told Reuters. Six out of eight said they see signs of entrenchment.

This is an outcome the Bank of Canada had hoped to avoid, saying it would require more aggressive rate hikes to get inflation back under control.

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The central bank has already raised interest rates by 300 basis points in just six months to 3.25% – the highest level in 14 years and the highest policy rate among the central banks that oversee the 10 most traded currencies.

However, economists do not expect any shift to the wage-price spiral to be permanent, especially if the economy slows.

“We believe that large interest rate increases will be followed by a recession next year… which will prevent the outlook from coming loose,” said Nathan Janzen, assistant chief economist at Royal Bank of Canada.

Economists at Desjardins and Oxford Economics also expect large interest rate increases to lead to a recession, although they describe it as a moderate slowdown.

For its part, the Bank of Canada says it can slow growth without hurting the economy.

“The bank still sees a path to a soft landing. That’s still our goal. We need to calm the economy to bring inflation back to target,” New York Stock Exchange Deputy Governor Carolyn Rogers told reporters earlier this month.

As for headline inflation, the central bank is back to 2% in 2024. Most economists agree with this time frame or think it could happen soon.

β€œWe think this will be the 2024 story,” said Beata Caranci, chief economist at TD Securities. “But there should be convincing evidence that the data is trending in that direction during the second half of 2023.”

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