Canada may need a recession to cool inflation

Canada may need a recession to cool inflation

By Julie Gordon and Fergal Smith

OTTAWA (Reuters) – The 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 prices are rising quickly. intertwined and warn that a retreat may be necessary to avoid a spiral.

Canadian inflation data for August will be released on Tuesday, and analysts forecast 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 inflation measures – Core CPI, Median CPI and Trim CPI – which together are seen as a better indicator of underlying price pressures. The record average of 5.3% came in July.

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

“Rapidly cooling growth, a pullback in housing prices, and less pressure on supply chains will help limit core inflation relatively soon,” said Doug Porter, chief economist at BMO Capital Markets.

“However, we believe it will be sticky, and will come down slowly in 2023,” he said.

Signs that inflation is creeping up in the economy, economists told Reuters due to an increase in prices, increased wage settlements, as well as an increase in consumer and business inflation expectations. Six out of eight said they see signs of bloating.

That’s an outcome the Bank of Canada had hoped to avoid, saying more aggressive interest rate hikes would be needed to bring inflation back under control.

The central bank has already raised interest rates by 300 basis points in six months to 3.25% – a 14-year high and the highest policy rate among central banks overseeing the 10 most traded currencies.

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

“We think an aggressive hike in interest rates will lead to a recession next year … preventing expectations from coming completely unanchored,” said Nathan Janzen, assistant chief economist at Royal Bank of Canada.

Economists at Desjardins Group and Oxford Economics also see aggressive rate hikes leading to a recession, although they described it as a mild recession.

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

“The bank still sees a path to a soft landing. That remains our objective. We need to cool the economy to get inflation back to target,” Senior Deputy Governor Carolyn Rogers told reporters earlier this week. this month.

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

“We think it’s going to be a 2024 story,” said Beata Caranci, chief economist at TD Securities. “But there should be strong evidence that the data is trending in that direction within the second half of 2023.”

(Reporting by Julie Gordon in Ottawa and Fergal Smith in Toronto; Editing by Daniel Wallis)

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