The August inflation data have been released, and it has some good news for anyone with a variable rate mortgage or debt on a Line of Credit; for the second month in a row, the rate of inflation has decreased.

August’s inflation rate fell to 7% on an annualized basis, down from 7.6% in July and from the peak of 8.1% in June.

The biggest contributor to the decline in inflation for August was a substantial drop in fuel prices, but there were also declines in travel and accommodation costs.

The only negative point was the cost of groceries, which increased by 10.8% from 2021. Food costs are being pushed up by a combination of factors including Russia’s invasion of Ukraine disrupting supply chains, higher input costs of fuel and fertilizer for farmers, and extreme droughts in some areas impacting crops and livestock. On this front, it’s unlikely that we’ll see relief anytime soon; the war in Ukraine has now likely disrupted farming enough that it will substantially reduce next year’s yield (reducing the overall world supply of grains and cereals for 2023), and the input costs for farmers (fuel and fertilizer) are going to remain high for the foreseeable future.

Overall though, the downward trend in inflation is a very good sign, as it means that the interest rate increases by the Bank of Canada over the last 6 months are making an impact.

Of course, the Bank of Canada’s work won’t be done until inflation is back in their target range of 2-3%, so we do expect a few more rate increases this fall and winter. Right now, the general consensus among banks and economists is that we will see Bank of Canada’s overnight lending rate increase another 0.75% (reaching 4%) before inflation has been fully reigned in.

However, if the inflation rate continues to drop over the next few months the Bank of Canada will become more cautious in their rate hikes, increasing by smaller amounts at a given time, so that they don’t overshoot the mark and push the economy into a deep recession. There are already signs that we’re flirting with a recession right now, as growth is slowing and the labour market is shedding jobs. With the US economic growth now expected to be a paltry 0.2% this year, it looks like our largest trading partner is also heading towards a recession, and with the US Fed, European Central Bank and the Bank of England also aggressively raising rates to slow inflation in their jurisdictions, there is a strong danger that the combined effects could multiply and we could be entering a global recession for the next few years.

With all of that said, we believe that the Prime rates for variable mortgages and LOCs are near their peaks for this rate cycle; we expect that they’ll increase a bit more over the next 6 months (by another 0.5-1%), then stay flat for most of 2023 and then begin falling in 2024 as a national recession kicks in and the Bank of Canada has to take steps to prevent deflation. Fixed rates will likely follow a similar pattern, since recessions tend to push investors towards safe assets, increasing the amount of money available to fund mortgages (and therefore reducing the interest rates required).

For more info and analysis on the current state of inflation, see:

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