Will the Bank of Canada hike rates again? The next 10 days will decide.

The good news is Canada’s inflation rate has slowed to 3.4% - the lowest level in almost 2 years. However, the qualifier is mostly due to gasoline, as most other aspects are still going up fast.

Anyone worried about interest rates, economic growth and job numbers is bracing for a busy and consequential week. Canadians will be hit by a tsunami of economic data over the next 10 days. The latest inflation numbers, data on how much stuff Canada's economy is cranking out and a key reading on the mood of consumers, won't just tell us how the economy has performed through the first half of 2023, they'll set policy decisions that will dictate how the rest of the year will unfold. 

The reality is consumers keep spending

The theory is that as rates rise, consumers are squeezed by higher debt payments.

With more money going toward servicing their debt, Canadians have less of it to spend anywhere else. That tends to slow down the economy and bring down prices — which is exactly what the Bank of Canada is trying to accomplish with rate hikes in the first place: bring down inflation.But even as households are getting more and more squeezed, but they're continuing to behave in a way that doesn't necessarily reflect that reality of higher borrowing costs and higher inflation.

The impact of gasoline and food prices

Canada's inflation rate decelerated to 3.4 per cent in the year up to May, Statistics Canada said Tuesday, led by sharply lower gasoline prices.

That's a significant slowdown from the 4.4 per cent pace seen in April.

Gasoline prices were the single biggest reason for the deceleration. If gasoline is stripped out, the inflation rate would be 4.4 per cent.

Gasoline prices being down, on average, by more than 18 per cent compared to the record highs they were hitting this time last year, was enough to drag down the overall inflation rate just by itself. Last May, gas prices were climbing inexorably toward a peak above $2 per litre. Compare that to gasoline prices in May of this year, where they hovered between $1.50 and $1.60.

But beneath the headline slowdown in consumer prices, many facets of the cost of living are still increasing at an eye-watering pace.

Grocery prices went up at an almost 9% pace. That's barely lower than the 9.1% pace clocked in April, and still almost 3 x the inflation rate.Food prices have been increasing at a faster pace than the official inflation rate for more than a year now.

And, of course, the cost of keeping a roof over one's head continues to rocket higher. 

New and renewal mortgage interest rates have risen more quickly than ever

The mortgage interest cost index rose 29.9 per cent. That's the fastest pace on record, and it's happening because the Bank of Canada has been aggressively hiking its lending rate in an attempt to cool demand.

Variable rate borrowers hold their breath ahead of a crucial week of economic data. That's been a direct hit on anyone with a variable rate mortgage, where the cost of servicing the loan has been skyrocketing all year. Even mortgage renewals, at fixed rates, are having to renew and lock in much higher than they were paying before.

More expensive mortgage costs are the single biggest factor influencing the inflation rate, the data agency said. If mortgage costs are stripped out of the numbers, Canada's headline inflation rate would have been 2.5 per cent. That's down from 3.7 per cent in April.

Leslie Preston, an economist with TD Bank, noted that if you strip out volatile items like gasoline and mortgages, underlying inflation is still probably warm enough that the Bank of Canada is likely to think at least one more rate hike is warranted at some point. July 12^th is the next rate announcement.

We’re still spending more on retail goods

Retail sales numbers from Statistics Canada show increases in all sectors but furniture, appliances and electronics. And just last week, retail sales figures showed Canadian consumers were still spending at rates that just don't show an economy that is slowing.

Analysts say it is due to higher prices rather than people making more purchases, which has them forecasting another interest rate hike in July.

"Cooler goods inflation is welcome, but the Bank of Canada has likely been counting on that already as supply chain snarls improve," Leslie Preston said. "Canadian inflation continued to cool in May, but progress is unlikely to be enough to prevent the Bank of Canada from raising rates in July."

"It would likely take substantial downside surprises in data releases (i.e., lower inflation and / or GDP data) to prevent another hike at the next meeting in July," she wrote in a note to clients.

Most economists assume a rate hike is coming

Right now, most economists assume the Bank of Canada has another interest rate increase up its sleeve. The bank has repeatedly said the perils of high inflation are a threat to everyone and risk upending financial stability. Bank of Canada governor Tiff Macklem has said he needs to see economic growth slow further as evidence of the kind of progress the bank is looking for.

"We think they're gonna go 25 (basis points). They could have to hike higher if we're in a situation where expectations are not tamed," comments RBC Economist, Carrie Freestone.

And that's why this week's data are so important.

But, if there's been one constant in these three and a half years or so, it's that every time economists say they have a handle on what's going to happen next, the data comes in as a surprise.

From articles by CBC Senior Business Writer, Peter Evans