Piggy bank lifted up into sky by inflated balloon

The case for inflation falling by the end of next year remains strong, but the path to get there will not be a smooth one, says ​​CIBC’s chief economist.

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While inflation in some parts of the economy will cool or even face outright declines, Avery Shenfeld said other parts of the economy in both the U.S. and Canada could see elevated inflation for some time.

Increased rent prices, for example, continue to feed into the consumer price index (CPI) because not everyone’s rent comes up for renewal at the same time. Similarly, Shenfeld predicted upward pressure on prices for services still seeing increased demand as pandemic concerns fade.

Statistics Canada reported the inflation rate in September dropped slightly to 6.9% from 7.0% in August, with core inflation unchanged.

Wages also remain elevated in response to inflation and a tight labour market, said Shenfeld, speaking before the latest CPI release. That means labour intensive industries, where pay increases make up a significant part of the cost structure, won’t see any relief on the inflation front anytime soon, he said. 

That said, signs of softer inflation in 2023 have started to show up in other areas.

For one, Shenfeld said global energy prices have declined, particularly for oil, which he expects will stabilize at around $90 a barrel. Gas prices are also predicted to be a lot lower in 2023 on average than they were in 2022. And while food prices aren’t as likely to plunge, Shenfeld said they should at least level off. 

So, while a longer period of slow economic growth will be necessary to address the broader inflation issues, Shenfeld said, it should mean that by late 2023, the overall basket in the CPI will be running closer to the Bank of Canada’s 2% target. 

However, Shenfeld said a reheating of inflation in 2024 is not off the table should the Bank of Canada cut interest rates too abruptly or if the federal government provides too much financial stimulus.

“While we do expect inflation to look a lot lower at some points in 2023, to keep it there over the medium term, we’ll likely need to see a continuation of relatively disappointing growth for at least another year into 2024,” he said. 

The good news is that despite inflation reaching its highest level in four decades, Shenfeld said the situation is not as dire as it was in the 1980s. At that time, inflation was not only elevated, but it was expected to remain elevated for the following decade. “We really needed a very large recession to get inflation under control,” he said. 

More of today’s inflation isn’t rooted in excess demand, Shenfeld said, but rather in difficulties in the global supply chain in responding to that demand. He’s hopeful that by this time next year, most of those difficulties will have been resolved, which will “take some of the wind out of the inflation that we’re seeing now.”

Regardless, he said that while a quick turnaround to the Bank of Canada’s 2% target is unlikely, he expects financial markets to be able to breathe a sigh of relief by this time next year as inflation surprises subside.

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