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Inflation 2021
February 20, 2021
7:16 pm
Loonie
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Interesting article, BoC buying up provincial debt with a view to future.

https://www.bloomberg.com/news/articles/2021-02-17/boc-snaps-up-provincial-debt-as-reflation-drives-yields-higher

I found the comments from Stephen Brown quite astonishing, even though I have said in this space before that I think inflation is coming.

"Annual inflation in Canada accelerated to 1% last month, the highest in almost a year, Statistics Canada reported Wednesday in Ottawa. That trend will probably continue to accelerate in coming months and may rise to 3% or higher in April, said Stephen Brown, senior Canada economist at Capital Economics in a note today. Canadian government yields, the benchmark used to price provincial bonds, rose in recent days and the 5-year touched its highest level since April on Wednesday."

Would this have a direct impact on interest rates more generally?

February 21, 2021
4:31 am
Jon
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Inflation is in large part, the product of expectation of inflation (I will not explain why again, is getting annoying for forum members). If people believe there are higher inflation in the environment when we have huge money supply, it could lead to higher inflation.

February 21, 2021
5:36 am
dougjp
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Of course everyone has an opinion, or is that a guess.

IMO it will be core cost push inflation, but not driven by wages this time around. The most basic kind of inflation where the end sale cost of a product cost goes up because of recouping costs caused by inefficiencies, structural blocks, attempts to recoup losses "capitalized (hidden)" so far in balance sheets that can't stay there forever. Etc.

Last month's inflation increase was mostly the cost of gas. Future month's will surely include a big factor for food cost. The danger of core cost inflation without offsetting income ability to pay is, when the government's cash flow to people stops, then stagflation seems inevitable. That's where costs are going up or already too high, unemployment is up, incomes stagnant and flat or negative economic growth. And add in one word we haven't seen in volume, yet. Bankruptcies.

In this environment I don't see interest rates increasing as governments will keep them low artificially. But I don't see rates dropping either. In other words, interest rates as an economic management tool has been filed in the history books, for now.

February 21, 2021
12:45 pm
Norman1
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Interest rates aren't going to change if the increase in inflation doesn't look like it will stay.

According to Understanding inflation targeting, Bank of Canada does not set interest rates based on what inflation is today:

But it takes some time (usually between 18 and 24 months) for changes in interest rates to affect every part of the economy. So we set the policy interest rate based on where we expect inflation will likely be in about two years, not where it is today.

US Federal Reserve has also said they stopped targeting current inflation as well. Instead, average inflation of 2% is the goal. So, having a year or two of 3% inflation is acceptable after a year or two of 1% inflation.

February 21, 2021
2:06 pm
Loonie
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In recent times we have seen the interest rates that we experience on the consumer end continue to fall even as BoC held steady. What am I to make of that in terms of the current prognosis if inflation continues to bounce upwards in the shorter term as this economist suggests?

I agree that food costs will likely be a significant component, but my experience is that those costs rarely go down again except seasonally to some extent with fruit and veg, one-off crop failures etc. And, we are told that deflation is a bad thing, right?

February 21, 2021
3:53 pm
dougjp
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Deflation, a guess about what happens, from history, in my opinion.

Business inventory levels balloon/turnover ratios slow as a low number of buyers show up, being fed up with prices, and/or unable to buy, and losing interest in buying anything but essentials. No name food brands predominate. Fear about the future.

Business cash flow dries up, especially high ticket item businesses (autos, big ticket electronics) or maybe about anything except survival items. Bankruptcies happen, obviously. Big discounts available to try and attract cash flow. Cash (that's us?) is King.

Deflation tends to be a temporary condition, but leaves many victims, and a few huge winners. Price reductions eventually bring out, first, cash volume buyers intent on flipping product, then anyone else with cash awakes and shows up for discounts. However overall recovery is anything but instant, as the core problems that started all this never went away.

February 22, 2021
11:54 am
Jon
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Interest rate will continue to increase in the short run, because the economy is recovering (velocity of money increase due to increase consumption and investment in an environment with an ample supply of money), and because oil price will rise significantly as economy becomes normalized while supply is constrained. However, I can see inflation will become subdued again and continue stuck at a low level in the next 5 to 8 years due to aging population (reduce in the growth of consumption, which paves the way to low business investment, as there are insufficient people buying goods and service. These two things reduce the velocity of money) and technological improvement (increase supply). Nevertheless, I expect to see much higher inflation afterwards as the impact of climate change, and trade protectionism become more apparent (trade protectionism reduces output, as suggest by Laws of Comparative Advantages).
(Plus the chance of a full - on world war as China and US fights to maintain or achieve technological dominance.)

February 23, 2021
7:40 am
Vatox
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We are at 1% inflation. We won’t see interest rates go up until we hit at least 2.5% and for a few months too.

February 23, 2021
9:33 am
Bud
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1% lol

February 23, 2021
7:52 pm
Loonie
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Vatox said
We are at 1% inflation. We won’t see interest rates go up until we hit at least 2.5% and for a few months too.  

OK. So Stephen Brown (#1 above) foresees 3% inflation by April as a real possibility.
Do you think this is realistic, and, if so, what would be the impact, if any (at least in the short term), on long and short term rates?

February 23, 2021
11:03 pm
Vatox
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Loonie said

OK. So Stephen Brown (#1 above) foresees 3% inflation by April as a real possibility.
Do you think this is realistic, and, if so, what would be the impact, if any (at least in the short term), on long and short term rates?  

It is possible we may hit 2.5 and even 3.0% in April or the Summer, because there will have been massive vaccine inoculations by then and Spring/Summer brings higher UV which kills viruses. We have also talked about everyone splurging because of pent up savings, energy and frustration.
I think it will be short-lived because the Fall and Winter 2021 will most likely bring a resurgence of infections, especially new variants that could even bypass the current vaccines.
It’s very hard to say what is coming in the long run. I think we could see a small rise in rates this Summer, but I have no idea what will happen after that because it’s a completely new world now, with this virus that will most likely become an endemic.
We have not dealt with this before so there is no gauge to predict.

I don’t think there will be any huge increases in rates though. That would only happen if this virus gets wiped out, and I don’t think that’s happening in the next year. I don’t see rates falling if that’s any encouragement!
But as always, I’ll say, my crystal ball is in the shop!

February 24, 2021
5:24 am
dougjp
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I continue to think interest rates as a tool is shelved for some time. BoC said this;

" Bank of Canada governor Tiff Macklem said he has no plans to raise interest rates until the economy and employment are back on track, and that will likely take until 2023. But there are signs it could be distorting the residential real estate market. Some observers have already expressed worries that the Canadian housing market is rising at an unsustainable pace, leaving critics — including some in the real estate industry — nervous of a boom, followed by a devastating bust once interest rates finally start to rise. "

Rather than rate increases which would tank the emerging economy, I look for a return to having some real estate and/or mortgage restraint tool used to try and cap the bubble, although those don't work very well.

February 24, 2021
5:33 am
Loonie
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Thanks.
Other pandemics have sort of burnt themselves out in anywhere from a year to five or six, occasionally longer. But there have been many confounding factors historically, so we can't make direct comparisons.

February 24, 2021
9:33 am
Vatox
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I Agree with Dougjp. A rate increase could be devastating because everyone has gotten used to rock bottom rates for a year now. Even a small increase is a massive difference for debt servicing. It’s too bad that rates weren’t normalized before this pandemic, as a small increase from much higher rates is not much of a difference and wouldn’t impact so severely. That’s why we will be in a serious situation where a choice will need to be made between inflation or debt servicing. I’m glad I don’t have to make that call.

February 24, 2021
10:14 am
Bruford
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Vatox said
I Agree with Dougjp. A rate increase could be devastating because everyone has gotten used to rock bottom rates for a year now. Even a small increase is a massive difference for debt servicing. It’s too bad that rates weren’t normalized before this pandemic, as a small increase from much higher rates is not much of a difference and wouldn’t impact so severely. That’s why we will be in a serious situation where a choice will need to be made between inflation or debt servicing. I’m glad I don’t have to make that call.  

Unfortunately we will all have to live with the consequences of this Government profligate spending. Higher taxes or devalued currency. Both will erode purchasing power.

February 24, 2021
11:14 am
Bill
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My guess is inflation will trump debt servicing, I think historically that's usually the winner. For one, inflation is a great way of making existing debt amounts easier to pay off. Two, we voters have shown no inclination to elect anyone who talks about paying off debt, about belt-tightening, we way prefer those who promise to keep and even expand spending. And I suppose as long as we're not more profligate than the Americans hopefully our currency should keep step with theirs.

February 24, 2021
11:19 am
topgun
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Bruford said

Unfortunately we will all have to live with the consequences of this Government profligate spending. Higher taxes or devalued currency. Both will erode purchasing power.  

Most people will adjust to rate increases. When I had a variable rate mortgage the rates went high at least twice. Once the rate went so high I was not paying the interest for many months. A small drop in rates meant it would take until I was 100 to pay off the mortgage. I eventually paid it off years early.

Have fun.

Have a Great Day

February 24, 2021
12:58 pm
Vatox
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Bill said
My guess is inflation will trump debt servicing, I think historically that's usually the winner. For one, inflation is a great way of making existing debt amounts easier to pay off. Two, we voters have shown no inclination to elect anyone who talks about paying off debt, about belt-tightening, we way prefer those who promise to keep and even expand spending. And I suppose as long as we're not more profligate than the Americans hopefully our currency should keep step with theirs.  

I’m thinking the opposite! Out of control inflation is a nasty situation while debt issues can be dealt with by lifestyle changes. I would definitely say that I would raise the inflation target to accommodate a bit higher inflation before interest rates should be increased, but I definitely would not allow debt loads to determine interest rates, inflation has to be contained.

Edit: I read your post again and it appears a bit conflicted. I think you mean Debt Servicing will trump Inflation and be more important to the masses. Meaning rates will stay low regardless of inflation.

February 24, 2021
1:06 pm
Bruford
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Bill said
we voters have shown no inclination to elect anyone who talks about paying off debt, about belt-tightening, we way prefer those who promise to keep and even expand spending.

The Government sees that pandering to those at the lower end keeps them in thrall to the largess, resulting in ever increasing numbers. Kind of like a positive feedback loop.

February 24, 2021
5:21 pm
Bill
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Vatox, I meant the impulse to inflate rather than deflate will be stronger, is my guess. Seems to me cases of runaway inflation are more common that deflation in other 3rd world, etc economies, even Germany between the wars was mainly ravaged by runaway inflation. Canada had much higher inflation a few decades ago, there was no talk of deflation, i.e. the people, ergo the gov't, preferred (then versions of) money-printing, spending and borrowing over restraint, cuts, etc.

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