Global debt has surged, rising more than $15 trillion since 2019 and reaching a new record of over $272 trillion in Q3 2020. The amount of global leverage will climb further as governments provide additional stimulus to combat the second wave and to help spur a recovery. Low interest rates and central bank purchases have been key to preventing a fiscal crisis. However, we know that excessive debt will be a key legacy of the COVID-19 pandemic and it will shape financial market performances for years to come. Credit ratings are bound to be cut for many sovereign issuers and corporations. Emerging market debt is a key concern.
In Canada, consumer prices rose by 0.7% on a year-over-year basis in October, up from a 0.5% increase in September. Excluding gasoline, prices rose 1%, identical to September’s increase. Overall, inflation continues to remain below the Bank of Canada’s target range of 1% to 3% reflecting significant slack in the economy.
When we look by category, this month’s rise in inflation reflects the broad trends we are seeing in the overall economy. Prices for traveler accommodation fell 22.9% on a year-over-year basis due to significantly reduced demand for travel. Mortgage interest costs fell 0.7% reflecting reductions in the Bank of Canada’s policy interest rate last March. Prices for clothing and footwear fell 4.0% as clothing stores have seen large declines in sales reflecting the fact that consumers are finding fewer occasions to wear new clothing.
Meanwhile prices for food increased 2.3% year-on-year as fresh vegetable prices soared 9.5% and meat prices increased by 1.7%. Meat prices have seen a significant increase in volatility due to COVID-19. Strong demand for new homes pushed up the costs for building materials. New home prices increased at their fastest pace in 14 years.
Core inflation continues to outpace growth in the overall CPI with the Bank of Canada’s three measures averaging 1.8% last month. This is up 0.1 percentage points from the increase seen in September. The CPI common, the Banks preferred measure, increased by 1.6% in October. News reports today are saying that the resilience of core inflation near the 2% mid-point inflation target support the decision by the central bank to reduce its bond-buying program to C$4 billion per week from C$5 billion. However, the rapidly rising infection rates that are leading to more restrictions that could materially weaken the pace of recovery and that might mean the Bank of Canada could need to reverse direction and provide more stimulus, at least temporarily, in early 2021.
There was considerable variation in price growth across the provinces. On the low end, consumer prices were weak through Atlantic Canada. PEI, Nova Scotia and New Brunswick all saw price growth of 0.3% or less on a year-over-year basis. Newfoundland was the outlier in Atlantic Canada where price growth accelerated to 0.6%, up from 0.3% in September. This was due to a large increase in cigarette prices due to higher taxes. At the high end, prices in Alberta increased by 1.5% due to rising food, transportation and shelter prices.
In terms of the outlook, inflation will remain under wraps as Canada’s economy continues to operate well below its full productive capacity. The recent increase in virus counts has also contributed to a slowdown in the economic recovery, meaning that it will take even more time until the excess capacity currently dampening inflation is absorbed. Consequently, price growth will likely remain soft for the foreseeable future. As a result, the Bank of Canada will not shift its focus from stimulating demand to worrying about inflation anytime soon, leaving increases in its policy overnight rate off the table until 2023.
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