In this week’s ATB Economics Weekly Wrap…

• Inflation: Falling headline, sticky core
• Consumers resilient in Alberta
• New housing: slower start, but migration to push
• Black Sea grain deal ends
• Chart of the week: Food Inflation

Inflation slips below 3% - At long last, Canada’s inflation rate fell within the Bank of Canada’s inflation-control range of 1-3%. June’s 2.8% reading was the lowest in 27 months.

Inflation has come a long way from the 8.1% peak just 12 months prior. But it will not be seen by the Bank as “mission accomplished,” and there are a few reasons why market reaction to the report was muted. First, it was largely expected. The Bloomberg consensus was 3%, not too far off the actual reading, and the Bank itself said that inflation would fall to “around 3%” over the summer. Second, volatile energy prices played a big role—the June 2022 energy spike created a high base year effect. The drag from energy will diminish over time. Third, core readings of “underlying” inflation didn’t move much, with the measures closely tracked by the Bank of Canada (trim, median, and common) remaining sticky and high (3.7% to 5.1% year-over-year). 

However, it’s worth noting that even the core measures are trending lower, albeit much more slowly. Mortgage interest costs are also adding a lot to inflation. Excluding these costs, inflation would have been 2% last month.  Assuming interest rates stabilize, this mechanical effect will also diminish over time.

Closer to home, Alberta’s inflation rate was even lower at 1.9% in June, well below 3.1% in May and the lowest reading since February 2021. Prices at the pumps were down more in Alberta than nationally, but price growth across most major components were slower in Alberta than in Canada as a whole (including food, shelter and recreation). Alberta’s inflation rate averaged 3.5% in the first half of the year, compared to 4.3% nationally.

Bottom line: This is an encouraging report, but the Bank of Canada will be looking for more evidence that the trend holds before its September 6 decision. There will be more data to chew on before then, including the labour force survey, GDP and July CPI.  While more interest rate hikes are on the table if inflation doesn’t cooperate, our current baseline view is that the Bank will press pause at the next meeting as it assesses the effects of past rate increases on the economy.

Housing starts drop in first half, poised to improve - Housing starts are one of the most volatile indicators, so we’d caution against reading too much into last month’s pullback or May’s spike. But the trend so far this year has been clear: 29,200 (annualized) in the first half, down from 35,700 during the same time last year. Activity has been held back by higher interest rates and elevated construction job vacancies.

In other years, 29,000 housing starts would be decent—it’s close to the 5-year average.  But this isn’t a typical year. Alberta recorded a 4.5% spike in population growth in the first quarter over the same time last year, representing over 200,000 new Albertans. Household formation is currently outpacing new supply, and it’s manifesting in a tighter resale market (months supply of homes fell to 2.7 last month).

Alberta housing prices are on the rise again, with the MLS composite housing price index up 0.8% year-over-year (y/y) in June and eclipsing its previous high (April 2022). Calgary has been a major driver (+4.2% y/y). In fact, Calgary is the only Canadian city over a million people where housing prices have actually increased during this tightening cycle (see the chart below). Even with the latest increases, the benchmark price in Calgary ($539K) remains below other major centers, including Toronto ($1.16M), Vancouver ($1.19M), Ottawa ($639K), though placing above Montreal ($508K) and Edmonton ($367K).

Bottom line: Higher interest rates have taken a toll on residential activity, but demographic forces are expected to push starts higher later this year and next. Our June forecast calls for 37,100 housing starts in 2024.

Russia abandons Black Sea grain deal - When Russia invaded Ukraine in February 2022, grain shipments from Ukraine via the Black Sea came to a halt and global food prices spiked and the threat of famine increased. In July 2022, Russia, Ukraine, Turkey and the United Nations came to an agreement called the Initiative on the Safe Transportation of Grain and Foodstuffs from Ukrainian ports (a.k.a. the Black Sea grain deal). Almost 33 million metric tonnes of grain were exported under the agreement, but Russia let it expire on July 18, 2023 and has indicated that the deal will remain off unless certain demands regarding the shipment of Russian food and fertilizer are met.

Bottom line: Global corn and wheat prices have already spiked this week as a result of Russia letting the deal expire. If the deal is not renewed we can expect renewed upward pressure on crop prices.

Chart of the week - Food prices up across all major categories - It’s no secret that food prices have been rising at a rapid rate and remain one of the sticky components of inflation. The inflation rate for food in Alberta peaked at 10.6% in November and was sitting at 7.9% as of June (8.3% nationally).

As our Chart of the week shows, food price inflation has been widespread across categories, with all items rising by at least 3% over the last 12 months. Some food items have gone up more than others. As a group, the price of “edible fats and oils” (e.g. margarine and cooking oil) increased the most of any food category in the Consumer Price Index basket, followed by chicken and beef. The lowest price gains have been for cheese, fruit and pork.

Bottom line: There are some interesting differences between Alberta and Canada, but the main story is that both Canadians and Albertans are paying a lot more for their groceries than a year ago. The fact that every major food category has increased also means that substituting one food for another may help, but it’s difficult to avoid higher food prices altogether.

Interesting fact… Alberta is Canada’s second largest producer of wheat - Our friends in Saskatchewan produce the most wheat in the country, accounting for 46% of total Canadian production over the last ten years (2013-2022), but we are in second spot at 31%. We have, in fact, held down second place every year since 1920 except for 1931, 1937 and 1938 when we were in first spot and 1985 when a bumper crop in Manitoba pushed it up into the number two spot. After a bad year in 2021 when Alberta’s wheat production was just 6.4 million metric tonnes (the lowest since 2007), production peaked in 2022 at 11.3 million tonnes, beating the previous high set in 2013.

Daily trivia

Answer to the previous trivia question: American Neil Armstrong became the first person to walk on the Moon on July 20, 1969.

Today’s trivia question: Which country produces the most wheat?