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Research Brief

Canada Inflation

October 2024

CAN Money

Headline Inflation Falls Below Central Bank Target,
Setting the Stage for CRE Rebound

Inflation reading underscores the need for larger rate cuts. Canada’s consumer price index rose 1.6 per cent year over year in September – down from 2.0 per cent in August – amid a 7.1 per cent monthly drop in gasoline prices. This was the lowest CPI reading since February 2021 and well-below the consensus estimate of 1.8 per cent. When excluding gas, however, inflation held at 2.2 per cent. Additionally, the Bank of Canada’s preferred measures of core inflation, CPI-median and CPI-trim, remained unchanged at 2.3 per cent and 2.4 per cent, respectively. On a three-month annualized rate, these core measures on average edged down to 2.1 per cent. As a result, an outsized rate cut of 50 basis points at the Bank of Canada’s policy meeting later this month is now heavily favoured.

Further indicators support more aggressive monetary easing.
On top of below-target inflation, additional indicators point to a weaker economy in need of a less restrictive financial environment. The unemployment rate has risen nearly 100 basis points over the past year, ending September at 6.5 per cent. Moreover, activity data is pointing to much weaker third-quarter GDP growth than the BoC anticipated, which was further highlighted by the recently released business outlook survey. This negative indicator is consistent with sluggish economic expansion. Coupled with a more interest rate-sensitive economy amid elevated household debt, Canada has been in a state of excess supply since late 2022. Along with historic population growth, GDP per capita has been falling since early 2022. These factors suggest the BoC may have maintained too restrictive a policy stance and that outsized rate cuts are needed before year-end.

Commercial Real Estate Outlook

Investor confidence to grow within CRE sector. The Bank of Canada’s overnight rate peaked at 5.0 per cent between July 2023 and June 2024. Along with broad-based weakening in Canada’s economy, both five- and 10-year bond yields have been trending down over the second half of this year. Following September’s deceleration in inflation, bond yields inched lower across the curve as a result. Combined with healthy fundamentals over a wide range of property types and an expected recovery in GDP growth over the second half of 2025, investor confidence has been growing. Preliminary estimates indicate that total transactions among major commercial property types were up 12 per cent over the trailing 12-months ended in the third quarter, which translated into a 3.0 per cent jump in total dollar volume. With limited supply holding vacancy rates well below equilibrium levels, grocery-anchored retail, multifamily and industrial continued to be favoured investment options.


Preferred properties see elevated inflation.
Prices for day-to-day basics kept stoking inflation. While apartment rent growth slowed to 8.2 per cent in September, it nonetheless stayed elevated – up 21 per cent compared with September 2021. Grocery prices were also up 2.4 per cent year over year and 20.7 per cent compared with 2021. The rapid price appreciation in these sectors underscores strong underlying demand for both multifamily and grocery-anchored retail, largely fuelled by historic population growth and restrictive interest rates. These factors drove a large share of residents to the rental market and redirected spending to more essential-based products, generating positive investor sentiment for these property types.


 

* Through September; ** Preliminary estimates through 3Q
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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