Inflation is at a 2.5% pace, a 4-year high. Stats Can says mortgage costs are the main culprit.
Now the Bank of Canada may have another inflation worry: oil. CIBC World Markets predicts oil will hit $100 a barrel by 2009.
It may sound alarmist but, if CIBC is right, it could take more than one or two more rate hikes to control inflation.
The odds of the interest rates going much higher (.75% more) are slim. During the 70’s in the US and Canada unions asked for and got higher wages. Unions in the US in the early 70’s were about 30% of the work force. Today it is about 6%. Unions at airlines, Ford, GM etc. are giving up wages etc.
What does this mean? CIBC reports the quality of jobs is going down over time. So as people fill up their cars, buy food, other things will have to slow down, like the price of houses. Just a thought.
Brian Poncelt, CFP
Hi Brian, It will be interesting to watch. As you note, manufacturing (and it’s labour force) is a small component of Canada’s economy these days.
However, housing is on fire and oil is used in everything (cars, commercial transportation, plastics, etc). If oil does leap another 33% to $100 I’d be shocked if inflation didn’t jump too. With the Bank of Canada so fixed to its target 2% inflation rate, it’s hard to imagine they wouldn’t act agressively.
Have an excellent day,
Rob
Hi Rob,
Yes you could be right the BOC could raise rates…but watch how new car sales, house prices fall, and retail sales fall etc. With in short time the country would be an recession. Remember, house prices etc., are backed by the highest debt levels in history! Remove the juice and the party ends!
regards,
Brian
Hi Rob,
I thought I would follow-up on the $100 oil and interest rates. We hit $100 (it’s now down to about $96) but interest rates have gone down!
Why? As enegery prices go up inflation does go up but wages are not. So the economy slows, and inflation does not look as bad as a slowing economy.
If any one remembers the 1970’s oil went up and wages went up as well. Now you have high energy prices but very modest wage increases. If wages go up in a big way then I think we have problems (omitting Alberta of course).
If I was smart I’d be in the Bahamas for six months of the year!
regards,
Brian
Would check your assumption again – the latest StatsCan Labour Force Survey shows that growth in average hourly wages in November was up 4.2% over the previous year, which is well above CPI.
Canada has been relatively sheltered from higher oil prices by our historically high dollar, more than anything else. It’s also kept prices of other imports down, which keeps inflation lower than it would otherwise be.
Hi Al,
Take a look at Ststistics Canada web site. Nov. 2007 “Fuelled by higher gasoline prices…consumer prices increased by 2.5% between Nov. 2006 and Nov. 2007.”
“Gasoline has been the dominant factor in the annual growth in all-items index since Sept.”
“Gasoline prices were 17.6% higher in Novemeber 2007 compared to the same month in 2006″…guess what, wages are not keeping up with energy prices!
The high dollar helps but does totally protect. Example Jan 2007 oil was about $61 now is is around $96 even with about a 20% appreciation on the Loonie there is still a short fall.
When the CPI numbers which exclude energy the CPI numbers or “inflation” is usually much lower than with energy. Energy from Nov. 2006 to Nov. 2007 was up 10.3% Vs. the CPI “basket” or core CPI of 1.6%! (See CPI below)
The CPI (consumer Prices Index) is a fixed “basket” of things the “typical” Canadian consumer buys evry month, so if you bought a laptop or car, prices have gone down, but how often do you buy these things? Without energy the CPI has actually fallen lately.
As we pay more for gas, shipping etc. Less is spent elsewhere. Bottom line is I think interest rates are not going any higher for at least a year and we may see interest rate cuts first.
regards,
Brian
I may have misread your original post. My point is that even though growth in energy prices has outpaced wage growth over the past few years, wages are still growing at a rate above CPI, and are therefore contributing to (not taking away from) inflationary pressures.
Core inflation may be low, but using it as a measure (as the BoC does) and omitting volatile items like mortgage costs, some foods, and oil products doesn’t mean that almost everyone isn’t feeling the effects of higher prices in these areas.
Having said all that, I’m all for lower interest rates, but the Bank has to be careful that it doesn’t get overenthusiastic. They’ve shown themselves to be highly competent so far, so I think we’re in good hands.
Hi Al,
If you want to look into the future look at Japan. In the 1980’s real estate was very high. Banks and businesses were leveraged on (real estate) have fallen. In order to get things going again the Bank of Japan cut their bank rate to a current rate of about .5%. Once you hit those levels, cutting interest rates has almost no effect on the economy. The biggest problem believe it or not, is falling prices…only time will find a bottom, then no interest rate cuts helps, banks tighen up on their lending and unemployment goes up.
Every one says the US may have a “soft landing”. Maybe they are right. But with record debt levels for consumers and the US governments I think the bad news is like the tsunami. While it looks not so bad in the ocean when it comes closer its too late to run. I think that the high energy prices, may be the straw that “breaks the camel’s back”.
regards,
Brian
Hi MT,
Well we hit $100 oil. Interest rates are going down. The big news is US. housing prices are going down fast. I think this may take years before they hit bottom.
Where does this leave us in Canada? If I was smart I would be some where warm right now. But paying down debt and investing is a great idea for most Canadians.
regards,
Brian
Hi MT,
Well we hit $114 per barrel of oil today. I think when this summer comes interest rates will be going down…but who cares if we are paying a $1.50 per liter!
The other story is natural gas, the prices have climbed 430% since 2000 and March (2008) was the largest increase (up 4.2%) in 33 years! Heating homes this winter will be painful, come bill time.
Who needs any interest rate increases to slow the economy, when the high prices of oil and gas will do this for us?
regards,
Brian
Hi Brian! You’ve been right so far. Kudos on that. It will be interesting to see if/when all these petroleum increases will filter through the economy and adversely impact Canada’s CPI. The credit markets seem to be getting “nervous.”
Cheers,
Rob
Hi Rob,
In my world there is lots of talk about how the US recession will not really hurt us in Canada. They could be right, but even in Alberta people drive cars and heat their homes. This means less money to buy bigger houses, cars you name it.
Martin Feldstein was in Toronto last week giving a talk about the US economy. He was president Regan’s cheif economic advisor. He was suggesting that this time the US recession will probably last longer than the 8-9 months of down turn we saw in 2001 or 2003. This “may be the longest down turn in fifty years”! He said he could be wrong, but the housing market is now the worst since the 1930’s in terms of declines in home prices.
Who knows…
regards,
Brian
Hi Guys,
So oil is now $126 a barrel! Here in Oakville, it is $1.24 per litre. My guess is this summer there is still more pain…so interest rates are not going anywhere for a long time. (I could be wrong)
The untold story is natural gas which has almost doubled since January! Which means heating costs for the winter should be almost double! The good news is real estate in the US is getting cheaper by the week.
regards,
Brian
Ok Guys,
I have been yaking about oil for almost one year, saying that this is going to drop interest rates because of the devasting damage to our economy. Oil is now about $139 per barrel. Gas around here is now $134.9 last year it was about $104 per liter (Toronto)
I have been wrong in the past, but one person I follow is Matthew Simmons. Some of his clients are Halliburton, General Electric, and the World Bank. He is saying already there is fuel shortages in China and a fuel shortage will hit North America. He thinks this is going to be here shortly (I don’t no what shortly is, but expect prices to go higher yet!)
I am going to be out of town next week talk to you guys later!
regards,
Brian
Hi Guys,
Ok one year later… Oil is now $120 (it peaked at $147). Gas is about $1.24 in the Toronto Area. Vancouver is about $1.32 this compares to about $1.08 in 2007.
What does this mean? Well I can’t guess the future (I would have picked the 6/49 numbers a long time ago!) But I don’t think we are going to cheap gas anytime soon (like $1.00 per litre).
The world needs about 3 million barrels of oil per year to replace the natural decline rates. Unless China goes into a deep decline as well as the US oil will be high.
Look at another problem not talked about in the media…natural gas.
Natural gas demand in North America is increasing at about 3 % per year whereas supply is increasing at about 1%. This means heating cost are going up big time. (source: energyshop.com)
As far as interest rates read my thoughts about a year ago. Nothing has changed. (prime that is)
Hey, Morgage Trends, how are you enjoying B.C.? (I bet you are doing a lot of fun stuff there!)
Cheers,
Brian
I thought I’d revisit my thoughts on where oil was going and interest rates (July 07). Oil today is about $100 and there is no talk about interest rates going higher, (even though every one is worried about inflation)
Yes oil peaked at about $147 in July 08. But with the bail-out of AIG and others by the US government, the US dollar is going down, which means oil is going to be high (historically speaking).
I think prime will remain low for at least another year. I could be wrong, but the US and the Canadian economy are looking weak. Having said all this, trying to predict interest rates into the future, is like guessing what the winter will be like in the summertime!
regards,
Brian
Let’s look at $100 oil. Ok, it’s about 56 bucks now! Oops, didn’t see that… What does this show? It shows no buddy can guess the future!
The only thing I got right so far is the interest rates (prime)would remain low, but give it time and I may be wrong on that one too! (the market is crazy out there!) My thinking is even with cheaper energy (for now) job losses will keep rates down…but who knows what our banks may do.
Go with what you are comfortable with. Even a clock is right twice a day!
regards,
Brian
Brian, you were more than just a tad off–you were way off on predicting oil prices–60% drop of late, I also refer to your earlier post of April 2008–where you stated–In my world there is lots of talk about how the US recession will not really hurt us in Canada. No offense Brian but what’s been going on in the U.S has been affecting us in Canada since fall of 2007–so not sure where you were hearing that at the time, the media has just been late in noticing, at least you admitted you were wrong, that’s half the battle.
Hi Mike,
I think you may have misread my post in April or I didn’t express myself clearly. The talk of a recession not affecting Canada (from the US) was was not me thinking this.
If you read further down the same post, I said Martin Feldstein was suggesting that this time the US recession will probably last longer than the 8-9 months of down turn we saw in 2001 or 2003 Feldstein was saying “may be the longest down turn in fifty years”!
Looks like he may be right.
Most of my comments about the (Canadian)economy have not been postive. What happens in the US generally comes to Canada in due time.
Regards,
Brian
Hi Guys,
Here I go again! The price of oil is now over $50 per barrel mainly because the US dollar is getting weak. I don’t think it’s going to $100 any time soon.
The enonomy is not that strong and interest rates are still very low… and may be low for a number of years to come. If job losses remain high then cheap money may not be enough to get thing going unless the jobs come back.
Almost two years later…still low interest rates! So much for inflation! Oil is about $57 per barrel but I think that may be due a weaker dollar recently.
Until jobs are created interest rates will remain low for a few more years. Or real estate prices must fall lower and faster.
Hey Brian,
I always look forward to your quarterly confirmation of your prediction. :)
It’s worth noting that other factors have impacted any theories from July 2007, namely one of the biggest recessions of all time and a mortgage/real estate catastrophe that few could foresee. Oil alone is fortunately not a driver of rates!
Cheers,
-rob
Hi Rob,
Ok two years later…(see my post July 2007) interest rates low inflation low, oil prices right now about $74. Now that oil is going back up watch for “inflation going up” (as to be reported in the media) Yet rates will most likely remain low.
You are right about other factors besides oil driving interest rates.
High dollar, high unemployement these are big factors too. So right now I am still thinking interest rates may remain low for awhile yet.
This is just my thoughts and I could be wrong.
Brian
Hi Rob,
Well a little early, but here is my 2 cents worth.
From the FT in London.
“September was the 21st consecutive month that the US economy has shed jobs and the unemployment rate, which has doubled in the last two years, ticked up to 9.8 per cent. The data were worse than even the grimmest predictions.”
The thing that got my eye was 21 months of losses!
The Canadian dollar vs. the US dollar this year is reflected in the Dow Jones in Can. dollars as given investors about -5% return on their money this year.
The price of oil is actually high because of the US dollar. So my thinking is the interest rates will remain low for at least another year or more. If interest rates go up in Canada (read stronger dollar) or in the US, read more unemployment, lower house prices.
Hi Rob,
Great interview on BNN with Andrew Bell (November 26, 2009). I thought you gave some good advice. Ok, lets look at oil prices (which at this time is also a play on the US dollar). The price of oil really is telling us the economy at this point is much weaker than even two years ago.
This I believe means the economy is still weak and interest rates will remain low for awhile… 2010 plus.
It will be going towards three years July 2007 when CIBC talked about inflation. Interest rates have gone nowhere and hot money has gone into real estate where even the bank of Canada seems to be concerned about this bubble.
The biggest concern is not rates, its what is there is another wave of unemployment to hit. Which means selling off of real estate. Prices are still going up, much higher than people’s wages so this can’t last. Property taxes (which nobody talks about) is going up in many parts of the country by 2% plus every year, something has to give.
Brian
Hi Rob,
Just an update (yes I am slow).
Oil is around $73 per barrel. Things have not changed. Rates are not going up. See my comments almost three years ago. At some point real estate will have to fall in Canada like the US…but when?
Rates in fact may be low for many more years. See Japan.
cheers,
Rob
Hey Brian, what’s your call for oil in 2025?
While you’re at it, who will win the Kentucky Derby next year? LOL.
Brian, I have to say your Narcisism is thoroughly entertaining and this thread of yours is brilliant! I cry laughing at every update so please keep up the good work.
Three years later…
Could $100 Oil Spike Mortgage Rates?
Inflation is at a 2.5% pace, a 4-year high. Stats Can says mortgage costs are the main culprit.
Now the Bank of Canada may have another inflation worry: oil. CIBC World Markets predicts oil will hit $100 a barrel by 2009.
It may sound alarmist but, if CIBC is right, it could take more than one or two more rate hikes to control inflation.
——————————————
I still do not see rates going up much any time soon, in fact the .25% increase could be lowered later this year or early 2011. I think this has been the only rate increase in three years! (prime rate)
Oil at $73 suggests even with the problem in the Gulf of Mexico with BP plus high inventories of Oil the economy is going nowhere. Gas prices have gone up from $.94 (in one day here in Toronto) a litre to about $1.04 thanks to the HST.
Which is like a interest hike anyway.
Happy Canada Day ROB!
Hi Brian,
Who could have imagined where the markets would be today? (rhetorical question)
This article was originally posted right before the bottom fell out of the real estate market. That’s something not even the Bank of Canada saw coming. Tremendous carnage took place in the months that followed July 2007. That economic devasation is why we have the record-low rates we do today.
In any event, thanks for all the comments the past few years on this thread. The point has been well-established that rates are a multi-factor variable–and oil ended up being dwarfed by other factors.
Cheers,
Rob