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Research Brief

Canada Inflation

May 2024


Inflation Continues on Downward Trend,
Increasing the Likelihood of June Rate Cut

Canada witnesses broad-based easing in inflationary pressures. Inflation hit 2.7 per cent in April — down from the 2.9 per cent reading in March — marking the fourth consecutive month that year-over-year price growth fell within the Bank of Canada’s target range. The Central Bank’s preferred measures of core inflation also continued to inch lower and are now within the BoC’s target range for the first time since June 2021. CPI-median fell from 2.9 per cent to 2.6 per cent and CPI-trim declined from 3.2 per cent to 2.9 per cent, bringing the three-month annualized rate to just 1.6 per cent. Broad-based deceleration in the headline CPI was led by food prices, services and durable goods, while it was moderated by gasoline prices and shelter costs. With both headline and core inflation now largely trending down for four consecutive months, the likelihood of a June interest rate cut continues to grow.  

Markets eying summer rate cut.
Following April’s inflation release, Canada’s dollar depreciated and bond yields fell, indicating that markets are further speculating a June rate cut. Combined with an economy that is losing momentum and a further deceleration in wage growth seen in April, interest rate swap markets increased their bets to a greater than 50 per cent chance of a June interest rate cut, with July sitting above 80 per cent. While a downward trend in core inflation has been established — which the Bank of Canada has indicated it needs to see — markets remain hesitant to fully price in a June cut. Nevertheless, it is becoming near certain that the Bank of Canada will begin lowering its overnight rate in the coming months, providing optimism for commercial real estate investors.

Commercial Real Estate Outlook

Falling interest rates to aid investor sentiment. While a shift in monetary policy will assist commercial real estate price recalibration, a significant uptick in investment activity that some expect may not materialize right away. This is because most CRE financing is based off longer-term money, and both five- and ten-year bond yields have largely been normalizing around their expected values. These factors are not likely to change substantially when the policy rate falls, given the current inverted yield curve. Mortgage spreads are tightening for preferred products like industrial and anchored-retail, which should facilitate some investment activity as opportunistic buyers look to capitalize on softening prices, falling variable rate mortgages and limited competition. The expected drop in the overnight rate should more so help encourage land sales and development activity as construction loans are primarily quoted off shorter-term money, such as one- and three-year bond yields, which are more influenced by the overnight rate.

Housing costs keeping inflation elevated.
Mortgage interest costs increased 24.5 per cent year-over-year in April, making homeownership out of reach for a growing share of Canadians and pushing many households to the apartment rental market. Combined with a lack of multifamily supply, rental inflation remained elevated at 8.2 per cent. Shelter inflation sat at 6.4 per cent and put the greatest upward pressure on headline CPI. If shelter costs were excluded, headline inflation would have sat at 1.2 per cent, well below the Central Bank’s target. Nevertheless, this strong rental rate growth has made multifamily a preferred investment option.      


* As of April 2024

Sources: Marcus & Millichap Research Services; Altus Data Solutions; Bank of Canada; Canada Mortgage and Housing Corporation;
Capital Economics; CoStar Group, Inc.; Statistics Canada

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