Canada may get some inflationary relief
Inflation remains a concern in the American economy, says a a senior macro markets strategist with Rabobank.
Christian Lawrence told the recent Alberta Beef Industry Conference in Calgary that inflation will remain a concern in the United States, regardless of how the tariff trade war plays out. The U.S. targets a two per cent inflation rate, but it has not yet lowered to that level.
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“Inflation in the U.S. got down to about 2.4 per cent last year, but it’s been heading higher over recent months,” he said.
“Why did inflation come down from those lovely heights back in 2022? A lot of it was to do with energy, but we also saw outright goods deflation for most of last year, and that is changing now. We’re going to get at least four or five months of upside when it comes to goods inflation in the U.S., ignoring the tariff situation and the other part of the inflation story is, of course, services.”
The American and Canadian business cycles have always been very closely linked, but they diverged over the last few years, which Lawrence attributed to the structure of the housing market in the two countries.
The 30-year mortgage rate in the U.S. has hovered around seven per cent. With mortgage rates up, the application rate for mortgages has gone down. Regardless of the slowed mortgage rate applications, housing prices in the U.S. still continue to skyrocket.
“It is the supply of housing in the U.S. The average mortgage rate of people who already have a house in the U.S . is around about four per cent, so there’s a big gap between these two. It matters because if it is your primary home in the U.S., you’re not selling it unless you absolutely have to because to buy another home would mean more than doubling your monthly payments,” said Lawrence.
“So there’s this complete deadlock in the U.S. housing market, pushing more people into renting, pushing up housing inflation, driving their overall inflation rates higher.”
Canada, on the other hand, has seen inflation drop to two per cent, which the Bank of Canada wants to see.
Lawrence has been following financial markets for 18 years, starting at the Royal Bank of Canada for the first six years. During that time, Lawrence wrote a paper saying the Canadian housing market looked overvalued, and it has only increased since that time.
Mortgage rates go up when the central bank starts raising rates, which hurts Canadian households.
“It squeezes them, whereas in the U.S., they’ve been pretty insulated. Nearly a quarter of all mortgages in the U.S. are fixed below three per cent. Mortgage rates go up, it means you don’t want to sell, but it’s not changing the sum that comes out of your pocket,” said Lawrence.
“So essentially, the U.S. consumer has been a lot more insulated from rising interest rates than the Canadian consumer because of the structure of the housing market.”
Lawrence thinks the U.S. inflation rate will go higher, to above 3.5 per cent this year and pushing up to more than four per cent next year.
“Of course, that will be tariff dependent, but the story in the U.S. is really one of rising inflationary pressures. In Canada, we can see a little bit of upside to inflation, but I still think we’re going to be below three per cent, so the Bank of Canada will be reasonably pleased with that.”
Source: producer.com