A new economics report suggests that Canadian inflation has been stubbornly sticky because of the prices of durable goods, which could come down quickly in the near future.

The report from Capital Economics published Wednesday shows the three-month annualized rate of Canadian durable goods inflation rose to 4.1 per cent in August, compared to 3.3 per cent in the U.S., which the report suggests represents the bulk of the difference between Canadian and U.S. inflation data.

Durable goods refer to all products not meant to be immediately consumed and be kept over a long time, such as appliances, electronics, furniture and vehicles.

RATE HIKE WOULD BE A ‘MISTAKE,’ REPORT AUTHOR SAYS

The report suggested that high bond yields, used vehicle prices dropping and the heat on the housing market should force durable goods prices to slow sharply, meaning the Bank of Canada should consider more interest rate pauses despite the recent inflation climb Canada has seen.

 

“It would be a policy mistake for the Bank to respond to the recent pick-up in inflation by hiking interest rates further,” Stephen Brown, deputy chief North America economist and author of the report, wrote in a LinkedIn post. “With the economy already flirting with recession, even just one more hike could be enough to push it over the edge.”

Brown projected that a durable good slowdown would see inflation reach the Bank of Canada’s two per cent target by the third quarter of 2024.

USED VEHICLES AND INFLATION

The report suggested most of the difference between Canada and the U.S. durable goods inflation comes down to used vehicles. In Canada, the three-month annualized pace of used vehicle price inflation was 5.1 per cent in August, compared to prices in the U.S. plummeting by 11.4 per cent annualized.

“The recovery in overall vehicle demand in Canada has lagged that in the U.S. slightly so the difference seems to be largely a supply story, with U.S. used vehicle prices now dropping back following their much larger price rise during the pandemic,” the report said.

The Bank of Canada is set to release its quarterly Business Outlook Survey on Oct. 17, providing more insight into inflation data and possible hints into what the central bank is thinking when it comes to its next interest rate announcement on Oct. 25.