While it is true that deficit spending has surged during the pandemic, the same is also true for nearly every country in the world. Moreover, accelerating inflation is a global phenomenon and most central banks believe it to be temporary. Certainly, Tiff Macklem is firmly of that view, as is the Fed Chair Jerome Powell.

Supply disruptions and base effects have largely caused the rise in inflation. Semiconductor production, for example, slumped during the 2020 lockdowns, and then couldn’t be ramped up fast enough when demand for cars and electronics returned, leading the prices of new and used autos to rise at a record pace. Prices for airfares and hotel stays also jumped. Companies found themselves short of workers as they reopened, leading some to offer bonuses or boost wages and subsequently raise prices for consumers.

Governor Tiff Macklem, whose latest forecasts show inflation creeping up to 3.9% in the third quarter before easing at the end of the year, has warned against overreacting to the  “temporary” spike.

Shelter Prices Rising Fastest

Prices rose faster year over year in six of the eight major components of Canadian inflation in July, with shelter prices contributing the most to the all-items increase. Conversely, prices for clothing and footwear and alcoholic beverages, tobacco products and recreational cannabis slowed on a year-over-year basis in July compared with June.Year over year, gasoline prices rose less in July (+30.9%) than in June (+32.0%). A base-year effect continued to impact the gasoline index, as prices in July 2020 increased 4.4% on a month-over-month basis when many businesses and services reopened.

In July 2021, gasoline prices increased 3.5% month over month, as oil production by OPEC+ (countries from the Organization of Petroleum Exporting Countries Plus) remained below pre-pandemic levels though global demand increased.

The homeowners’ replacement cost index, which is related to the price of new homes, continued to trend upward, rising 13.8% year over year in July, the largest yearly increase since October 1987.

Similarly, the other owned accommodation expenses index, which includes commission fees on the sale of real estate, was up 13.4% year over year in July.

Year-over-year price growth for goods rose at a faster pace in July (+5.0%) than in June (+4.5%), with durable goods (+5.0%) accelerating the most. The purchase of passenger vehicles index contributed the most to the increase, rising 5.5% year over year in July. The gain was partially attributable to the global shortage of semiconductor chips.

Prices for upholstered furniture rose 13.4% year over year in July, largely due to lower supply and higher input costs.

Monthly, prices rose 0.6% versus a consensus estimate of 0.3%. Rising costs to own a home are one of the biggest contributors to the elevated inflation rate, following a surge in real-estate prices over the past year.

Bottom Line

Today’s inflation data likely did little to alter the Bank of Canada’s view that above-target inflation will be a transitory phenomenon. They are already ahead of most central banks in tapering the stimulus coming from quantitative easing. They do not expect to start increasing interest rates until the labour markets have returned to full employment, which they judge to occur in the second half of 2022. In the meantime, pent-up demand in Canada is huge as people tap into their involuntary savings during the lockdown to pay higher prices at restaurants, grocery stores and gas stations. Financial markets appear to be sanguine about the prospect for rate hikes, as bond yields have been trading in a very narrow range.

The  Labour Force Survey showed employment rose 94,000 (+0.5%) in July, adding to the 231,000 (+1.2%) increase in June. The two months reversed the 275,000 jobs lost during lockdowns in April and May. Of the three million jobs lost at the start of the crisis, 2.74 million have now been recovered. The employment rate was 60.3% in July, still 1.5 percentage points below the pre-pandemic rate.

The unemployment rate fell 0.3 percentage points to 7.5%, matching the post-February 2020 low hit earlier this year.

Employment growth in July was almost entirely in Ontario. Youth aged 15 to 24 and core-aged women aged 25 to 54 accounted for the bulk of gains in the month. Women were hardest hit by the pandemic’s loss of childcare/schooling, so the make-up of employment gains will likely be skewed towards them.

The number of employed people who worked less than half their usual hours fell by 116,000 (-10.1%) in July. Total hours worked were up 1.3% and were 2.7% below their pre-pandemic level.

Self-employment was little changed in July and was down 7.1% (-205,000) compared with February 2020. The number of self-employed workers has seen virtually no growth since the onset of the pandemic.

The number of employees in the public sector fell by 31,000 (-0.7%) in July, the first decline since April 2020. Nearly half of the monthly decrease was in Quebec (-15,000; -1.5%) and was partly due to a larger-than-usual summer decrease in the number of educational services workers. Despite this decline, public sector employment at the national level was up 150,000 (+3.8%) compared with February 2020.

In terms of provinces, Ontario accounted for the majority of July’s improvement, as employment increased by 72k in the province. Manitoba (+7k), Nova Scotia (+4k), and Prince Edward Island (+1k) also saw employment advance on the month. New Brunswick (-3k), Saskatchewan (-5k), and B.C. (-3k) lost jobs in July.

Lastly, total hours worked improved by a robust 1.3% in July, but it is still 2.7% below its pre-pandemic level.

The Canadian jobs report coincided with the release on Friday of surprisingly strong U.S. payroll numbers, where 943,000 positions were added last month.

July was another solid month for the Canadian labour market as the loosening of public health restrictions across the country spurred hiring activity. That said, capacity limits and travel restrictions held back high-touch businesses from operating at full capacity, limiting job gains in July.

Indeed, employment in high-touch services is still well below pre-pandemic levels. Even with gains in July, accommodation and food services employment was nearly 20% below its February 2020 level. It’s important to note that July’s labour survey was taken during the week of July 11th, and restrictions in some provinces were loosened at the end of that week. So, we could see the recovery continue to strengthen in August.

There are growing headwinds, however. Concerns around the Delta variant are rising, and some countries, harder hit by the virus, are re-imposing restrictions. Canada has not yet been compelled to do so due to low hospitalization levels, but cases are rising. While the impressive vaccination drive should keep hospitalization rates low, health worries could dent consumer and business confidence. Indeed, the economy’s path forward will be closely linked to the evolution of the pandemic.

Jobs continue to swing back and forth as the various COVID waves drive lockdowns and reopenings. Hopefully, we’re in the last of the reopenings. Services accounted for all of the gains. Hospitality jobs were the biggest gainer, as expected, adding 101k positions, but they remain well below pre-virus levels. Restrictions are expected to continue easing through the summer, which should mean more solid gains over the next couple of months. Other sectors seeing a boost from the reopening were retail/wholesale (+78k), education (+26k) and health care (+20.5k). Goods sectors were down across the board, with losses concentrated in construction (-23k) and manufacturing (-12k).

Beyond the headline increase, one of the bigger stories in this report is the sharp 0.6 ppt rise in the participation rate to 65.2%. That’s the largest increase in a year and leaves the rate 3-4 ticks away from pre-COVID levels. Compare that to the U.S., where the participation rate is still nearly 2 ppts lower than in early 2020. The rise in the participation rate limited the decline in the jobless rate to 0.4 ppts to 7.8%, still some wood to chop there. The rising participation rate should alleviate some concerns about widespread labour shortages.The bulk of the gains were in pandemic-exposed sectors, like retail, food and accommodation, that got hit most by the new containment measures. Employment in accommodation and food services was up 101,000. The retail sector added 75,000 jobs.

Increasing vaccination rates and falling Covid-19 case counts have allowed the country to finally re-open restaurants, bars and retail stores after months of closures. Ontario began allowing patio dining earlier this month, and several cities in Quebec have further relaxed restrictions, allowing indoor dining for the first time this year.

With the June gains, Canada has recovered 2.65 million of the 3 million jobs lost at the height of the pandemic last year. The nation created 263,900 part-time jobs, with full-time employment down 33,200.Employment growth in June was entirely in part-time work and concentrated among youth aged 15 to 24, primarily young women. Increases were greatest in accommodation and food services and retail trade, consistent with the lifting or easing public health restrictions affecting these industries in late May and early June in many jurisdictions.

The number of employed people working less than half their usual hours fell by 276,000 (-19.3%) in June. Total hours worked were little changed and were 4.0% below their pre-pandemic level.

The employment increase in June was in part-time work, which rose by 264,000 (+8.0%) following combined losses of 132,000 over the previous two months. The overall level of part-time employment was essentially the same as in February 2020, before the COVID-19 pandemic. Increases in the month were driven by accommodation and food services and retail trade—two industries where part-time workers represent an above-average proportion of employment—and were concentrated among youth.

After falling by 143,000 over the previous two months, full-time work was little changed in June and was 336,000 (-2.2%) lower than its pre-pandemic level.

Gains were driven by private-sector employees, while self-employment declines.

The number of private-sector employees rose by 251,000 (+2.1%) in June, following two monthly declines. As of June, the number of private-sector employees was 2.5% lower (-313,000) than in February 2020.

In the public sector, employment rose by 43,000 (+1.1%) in June, bringing it to 180,000 (+4.6%) above pre-pandemic levels. Employment in this sector has trended up following the initial wave of the pandemic, particularly driven by increases in health care and social assistance, public administration, and educational services.

The number of self-employed workers fell by 63,000 (-2.3%) in June and was down 7.2% (-207,000) compared with February 2020. Self-employment is a broad category that includes workers in various situations, including working owners of incorporated or unincorporated businesses and independent contractors. Compared with June 2019, declines in the number of self-employed were widespread across multiple industries and were concentrated among the self-employed with paid help.

The employment rate remains below pre-pandemic levels.

To fully understand current and emerging labour market trends, it is essential to consider employment change against the backdrop of population change, which totalled 1.1% (+334,000) between February 2020 and June 2021. To keep pace with this population growth and maintain a stable employment rate—that is, employment as a proportion of the population aged 15 and over—employment would have had to grow by 203,000. Instead, total employment was 340,000 lower in June than in February 2020, and the employment rate was 1.7 percentage points lower (60.1% compared with 61.8%).

Number of Canadians who worked from home drops by nearly 400,000 

Among Canadians who worked at least half their usual hours in June, the number who worked from home fell by nearly 400,000 to 4.7 million. For 2.6 million of these people, working from home represented an adaptation to the COVID-19 pandemic, as this was not their usual work location. At the same time, the number of people working at locations other than home rose by approximately 700,000 to 12.3 million.

Almost one-third (31.4%) of workers aged 25 to 54 and more than one-quarter (27.2%) of those aged 55 and older worked from home in June. Due to their concentration in industries where working from home is less feasible, such as accommodation and food services, a far smaller proportion of youth aged 15 to 24 (12.9%) did so.

Regionally, Ontario and Quebec led the way higher, though B.C. and Nova Scotia had solid increases as well. Interestingly, even with restrictions easing through most of the country, only five provinces reported job gains.

Analysts anticipate that will come down to C$2 billion per week at the July 14 meeting before eventually falling to a weekly pace of about C$1 billion by early next year. In addition to the bond tapering, the market has priced in at least one interest rate hike by this time next year.

Canada’s economy remains 340,000 jobs shy of pre-pandemic levels. The unemployment rate was below 6% before the pandemic.

With vaccination rates rising and restrictions easing, economists are predicting a strong rebound in the second half. According to a Bloomberg News survey of economists earlier this month, Canada’s expansion is seen accelerating to an annualized pace of 9.1% in the third quarter, with a 6% gain in the final three months of 2021. Consumer and business confidence regarding the outlook has recently hit record highs.

The Bank’s view regarding the domestic economy appears to be little changed despite the April Monetary Policy Report (MPR) overestimating Q1 GDP growth by 1.4 percentage points. Indeed, today’s Policy Statement notes that Q1 GDP growth was “a robust 5.6 percent” and that the details of the report point to “rising confidence and resilient demand.” Concerning Q2, the third wave lockdowns are “dampening economic activity…largely as anticipated.” Note that the April MPR projected 3.5% growth in Q2 GDP, while the consensus forecast currently sits at 0% for Q2, with downside risk.

The Bank also noted that “Recent jobs data show that workers in contact-sensitive sectors have once again been most affected. The employment rate remains well below its pre-pandemic level, with low-wage workers, youth and women continuing to bear the brunt of job losses.” The chart below shows that the labour market is still below the Bank’s target for a full recovery.

“With vaccinations proceeding at a faster pace, and provincial containment restrictions on an easing path over the summer, the Canadian economy is expected to rebound strongly, led by consumer spending. Housing market activity is expected to moderate but remain elevated.”

On the inflation front, there were no surprises. The Statement says that inflation has risen to the top of the 1-3% control range due to base effects and gasoline prices. The rise in the core measures is blamed on temporary factors as well. The Bank anticipates headline inflation will stay around 3% through the summer before pulling back later in the year.On the cautious side, the BoC highlights that the labour market still has a way to go before healing. There’s also uncertainty surrounding COVID variants.

The concluding paragraph didn’t change much. It reiterates that there “remains considerable excess capacity” and that policy rates will stay at the lower bound until “economic slack is absorbed,” which the April MPR said was in 2022H2. Concerning further tapering, the “assessment of the strength and durability of the recovery” will guide that decision.

The C$ barely garnered a mention yet again, with the Statement noting the recent gains and accompanying rise in commodity prices. The market might view the lack of concern here as a green light for further strength.

The Bank of Canada is looking through “transitory” ups in inflation and downs in GDP. With vaccination rates continuing to ramp up significantly, and provinces beginning a gradual reopening process, the economy will rebound substantially beginning in June.

Indeed, with the near-term growth outlook increasingly bright, concerns have shifted to rising production input prices and the prospect for a sharp recovery in consumer demand to stoke inflation pressures. For now, the BoC is positing that near-term increases in consumer price growth rates will prove ‘transitory.’ But there have also been signs of harder-to-dismiss firming in most measures of underlying price growth gauges, including the BoC’s own preferred core measures edging up towards or above the 2% inflation target.

July’s meeting will likely be a bit more interesting with the Bank issuing more details in another Monetary Policy Report. We don’t see any need for dramatic forecast revisions at this stage, and the BoC’s guidance that rates might have to start increasing in the second half of next year remains appropriate. It looks like the main question will be around further tapering of the BoC’s asset purchases. The BoC didn’t signal an imminent taper (we didn’t think it would) but said decisions regarding the pace of purchases would be guided by its assessment of the strength and durability of the recovery. If incoming data aligns with the BoC’s forecasts, we could see it reduce weekly bond-buying again in July to $2 billion per week from $3 billion. If not, September might serve as a backup as the bank seeks to prevent its footprint in the bond market (nearly 44% at the end of May) from becoming too large while at the same time setting itself up to shift QE to reinvestment only well in advance of the first interest rate hike.