Canada’s price hike takes root, recession may be needed: economists – National

Underlying inflation pressures in Canada are expected to peak in the fourth quarter of this year, economists told Reuters, although most see signs that rapidly rising prices are taking root and warn a recession could be necessary to avoid a spiral.

Canadian inflation data for August will be released on Tuesday, with analysts expecting the headline rate to edge down 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 main measures of inflation – common CPI, median CPI and Quarterly CPI – which taken together are considered a better indicator of underlying price pressures.

The average of the three hit a record high of 5.3% in July.

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

“Rapidly slowing growth, falling house prices and less pressure on supply chains will help to limit underlying inflation fairly quickly,” said Doug Porter, chief economist at BMO Capital Markets.

“However, we believe it will be sticky and only slowly coming down through 2023,” he added.

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Widening price hikes, increased wage settlements, as well as rising consumer and business inflation expectations are signs that inflation is becoming more entrenched in the economy, said economists at Reuters. Six out of eight said they saw signs of rooting.

It’s an outcome the Bank of Canada was hoping to avoid, saying it would take more aggressive interest rate hikes to bring inflation 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% – a 14-year high and the highest policy rate among central banks overseeing the 10 most traded currencies.

Yet economists do not expect any shift to a wage-price spiral to be permanent, particularly if the economy slows.

“We believe that aggressive interest rate hikes will be followed by a recession next year…which would prevent expectations from completely coming off,” said Nathan Janzen, deputy chief economist at Royal Bank of Canada.

Economists from Desjardins Group and Oxford Economics are also forecasting aggressive rate hikes leading to a recession, although they call it a mild slowdown.

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

“The bank still sees a path to a soft landing. This is always our goal. We need to cool the economy to bring inflation back to target,” Senior Deputy Governor Carolyn Rogers told reporters earlier this month.

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As for headline inflation, the central bank is bringing it back to 2% in 2024.

Most economists agree with this delay or think it could happen sooner.

“We believe this will be a 2024 story,” said Beata Caranci, chief economist at TD Securities. “But there should be compelling evidence that the data is moving in that direction in the second half of 2023.”

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