Another month, another record inflation print here in the Great White North. Headline inflation in Canada ticked up to 7.7% year-over-year in May, a 39 year high. Shelter, which is the largest component of the CPI basket also moved higher, up 7.4% from last year. Of course if you’re relocating in the rental market or purchasing a home for the first time then shelter inflation is substantially worse than official headlines.

According to Zumper, one of the largest rental websites across North America, annual rent growth is surging across the country. Here are the top growers across across major metros for one bedroom units:

1. Calgary +15.2%
2. Victoria +15.0%
3. Vancouver +14.9%
4. Halifax +12.8%
5. Toronto +11.1%

For all the talk about housing bear markets, these aren’t the worst of times for landlords who hold cash flowing rental properties. Hard assets historically perform well during inflationary periods, assuming long term mortgage debt is secured at fixed rates and they can pass on costs in the form of increasing rents.

Where we go from here is anyone’s guess but things are getting messy. The response from policy makers continues to be an unmitigated disaster. First off, the Bank of Canada made one of the worst public calls on record, suggesting inflation was transitory. Now behind the eight ball they are aggressively raising interest rates hoping to slow inflation while believing they won’t trigger the debt bomb they helped create through a zero interest rate policy over the past decade. But wait, it gets better.

Finance minister Chrystia Freeland has just announced an $8.9B spending spree to fight inflation, or as they call it, an “affordability plan”. The cash drop provides $1.7 billion in new support for workers. It includes enhancements to the Canada Workers Benefit, giving $2,400 to low-income workers starting this year; a 10 per cent increase to Old Age Security for seniors older than 75, which is expected to give three million seniors $766 or more; and a one-time $500 payment to one million Canadian renters struggling with housing costs.

Suffice to say that sending cheques in the mail isn’t going to help reduce our inflation problem, nor will it reduce the soaring rents we quoted earlier. In fact, it makes the job even tougher on the Bank of Canada. Per ScotiaBank this week, “It is fair to say that fiscal policy authorities in Canada are doing nothing of any significance to slow inflation. A 2.3% reduction in government consumption is equivalent to a 75bps reduction in the peak policy rate.”

This is the problem with today’s society, nobody wants to tolerate any pain, governments are more focused on getting re-elected than solving real issues. It’s easier to print money than endure a period of austerity. Remember we are in this position to begin with because we overstimulated both monetary and fiscal policy during the pandemic and we must now drain the liquidity. Another 75bps rate hike from the Bank of Canada is coming July 13th and the sooner we all curtail spending, government included, the sooner inflationary pressures shall ease.

Three Things I’m Watching:

1. Shelter inflation ticked up to 7.4% year-over-year in May. (Source: Richard Dias)

2. The value of dwellings and land owned by Canadian households sits at nearly $8.5 trillion dollars. That’s nearly 600% of household disposable income. (Source: NBF)

3. Bear market for Canadian banks, as stocks plunge 20% from their February high. (Source: Bloomberg)

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