Posted: 22 Jul. 2020 5 min. read

Canadian inflation bounces back, US existing home sales rebound, geopolitical risks rise as US-China tensions build

Canadian inflation, as measured by the year-over-year change in the Consumer Price Index, bounced back in June to a reading of 0.7% from the prior reading of -0.4% in May. Much of the increase came from a recovery in prices for products that had been previous driven down by the pandemic, such as gasoline and clothing prices. Food and shelter costs remain a key contributor to inflation, with prices higher by 2.7% and 1.7% from year-ago levels, respectively. Excluding food and energy, inflation was 1.0% picking up from the 0.8% reported in the previous month. The Bank of Canada’s three preferred measures of core inflation ranged between 1.5% and 1.8%.

The main message is that inflation has been dampened by the drop in demand from the pandemic and economic downturn; but, as the economy reopened and growth resumed, prices for some goods and services have started to recover. The pace of inflation is slightly below the Bank of Canada’s midpoint target of 2%, within the target range of 1% to 3%.

The fact that Canada is avoiding stronger disinflationary or deflationary forces is a testament to the enormous monetary and fiscal policy response to the crisis. The outlook is that price pressures will remain limited in the near term, reflecting the slack in the economy during the early stages of recovery. Although recent economic data has been strong, we still anticipate a long recovery, with the Bank of Canada maintaining the overnight rate at the current effective lower bound of 0.25% until late 2022.

US existing home sales jumped higher by 21% in June, but this left them 11% below the level twelve months ago. Both single-family homes and multi-unit homes recorded strong gains. The inventory of homes available for sale is down 18% year-over-year, and this tightness in supply explains the 3.5% increase in home prices over the last year.

I know I say this with almost every US release, but once again, the rebound in activity in May and June has been very strong but the increasing health risks pose a threat to the US recovery. For example, Los Angeles is warning that the city could be heading for a renewed shutdown. If the US reopening is delayed or new shutdowns are implemented in large parts of the country, the US recovery will falter. Canada’s economy tracks the US business cycle closely, so any setback south of the border will be imported into Canada through trade ties.

The US has ordered China to close its consulate in Houston, Texas to protect US intellectual property. China is bound to retaliate. We have stressed that political relations between the West and China were likely to deteriorate, particularly between the US and China. The trade deal in December was akin to cease-fire. The technology cold war is continuing and there is the threat of increased protectionism. So, while the health crisis dominates the headlines, the political risks to the economic outlook remain elevated.

Economic Insights

A regularly updated snapshot by Deloitte Economics that provides commentary from Chief Economist, Craig Alexander on the latest developments shaping Canadian and international economies including, economic growth, business investment, trade, and market activity. Deloitte analysis gives you the knowledge to tackle the most challenging business issues of today.

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