The strategist answered questions from Gérald Fillion on the show Economy zone Wednesday evening.
Is the Ukraine effect really in the data published Wednesday by Statistics Canada on inflation, with food in particular? Is this what strikes us above all?
JIMMY JEAN – It’s starting to show, but the worst is probably yet to come. When you see the import price indices, there are big increases. These are contracts that are often negotiated well in advance regarding inventories. So, it’s a safe bet that it will take some time before we feel the full effects. [de la croissance de l’inflation alimentaire]. But we must not forget that we had harvest problems and pressures when the war in Ukraine started. We already had significant pressures in the power supply. So the risks remain on the upside and this forces consumers to make choices, perhaps to go to restaurants less or to shop a little more.
Inflation stood at 6.8% in April compared to the same period in 2021, up 0.1% from March data. Are we heading for a plateau or will inflation continue to accelerate?
not a word – Risks are tilted to the upside, and the forecasting community is extending the time before inflation moderates. What this illustrates is that this is a completely new situation. We have never been in a situation where we are coming back from a pandemic, there are still logistical problems, countries struggling with pandemic issues and there is a war. It’s very difficult to predict this kind of environment. It is a part of inflation that is very atypical.
But what complicates the matter even more is that we have part of the inflation which is very typical, which is linked to the very tight job market. There are also salaries which, even if they are not yet keeping up with inflation, the intentions are there and the pressures are there. Expectations start to rise more and more. There are therefore still risks of inflation persisting and the central banks will have to take this perhaps even more seriously than they did.
The Bank of Canada is sending signals to rise on June 1 by 50 basis points, half a percentage point, and in July by another half a percentage point. Will this be enough to slow or reduce inflation?
NOT A WORD – It is questionable. Because even with these 100 additional basis points, we will still be at 2% nominal interest rate. And when you look at inflation, that means monetary policy is in very accommodative territory. There are some former heads of the Federal Reserve in the United States who argue that rates should be around 5 or 6%. It would be extreme. The reason why we are cautious is because we do not know exactly what is really linked to the cycle [économique] and what is related to the supply shock. But there is a need to raise the rates.
If we raise interest rates too quickly, isn’t there a risk of causing a recession?
NOT A WORD – If we do it too quickly, it will be too destabilizing. But it is still necessary that in the short term, there is a fairly muscular sequence to at least return to neutrality. Monetary policy should no longer be accommodating as it is now. After that, we will have to take the pulse. Look at the real estate market. We saw it in 2019, we had gone to a key rate of 1.75% and the real estate market had slowed down. We will see the same thing this time.
The interview of Jimmy Jean, from Desjardins, with Gérald Fillion
Are rising rates calming the real estate market?
NOT A WORD – Absolutely. We saw it in the figures this week, with a drop of more than 12% in sales in the country, we even saw the price index across Canada drop. This is very early in the downturn cycle. Usually it takes some time before prices start to fall, there we already see weakness.
It is also a sign that there has been an exuberance. The effect of rising rates is making it harder to qualify for a mortgage and making payments more expensive. And that’s how monetary policy works. It is by slowing down the components that are sensitive to interest rates – real estate and purchases of durable goods such as automobiles and furniture – that everything will be called upon to slow down in an environment where the real estate market will slow down.
Would you say that there is a real loss of purchasing power for Canadian households right now?
NOT A WORD – Absolutely. And that is what has changed compared to 2020-2021. People marveled at the fact that disposable income was on the rise, that household savings had increased. But when you look at those variables now, and then factor in the effect of inflation, it’s normalized a lot. We can say that we are around the trends that existed before the pandemic, but it is much less rosy than it was just a few months ago, given the strength of inflation. Yes, there is an erosion of purchasing power, but it is a necessary evil. If we want to slow down inflation, we have to slow down demand. We must slow down the ardor of consumers.
Some comments have been edited for clarity and accuracy.