Canada's inflation dropped more than expected this month and came down to 5.2% from 5.9% the previous month. This was the first year-over-year drop as inflation registered at 5.7% last February. The 0.7% drop was the largest since April 2020. However, year-over-year base effects still make this an almost 11% growth over the last year. For example, groceries still lead the pack in growth, up 10.6% year-over-year, driven by supply chain issues and bad weather. The energy sector was a significant contributor to the drop in inflation but what was very significant about this print was that mortgage interest costs are showing up as an ugly component of the CPI basket, and that metric is surging. 0.7% of the 5.2% is from this! Meaning the Fed is creating the very same inflation they're trying to fight. March of 2022 inflation was at 6.7%, so base effects should see next month's inflation print continue to drop at a similar pace to last month's, placing it around the mid to high -4s should the trend continue.

This trend will impact mortgage rates eventually. The 5-year Canadian bond is now sitting at 2.79% and trending lower since bonds corrected downwards. If 5-year Canadian bonds stay low, mortgage rates in Canada are likely to follow suite as well. This is because mortgage rates are influenced by long-term interest rates, and 5-year bonds are one of the benchmarks for long-term rates in Canada. The last time bond rates were at 2.8% was back in 2010 when fixed mortgage rates were 5.4% and variable rates were 2.2%. While mortgage rates don't always move in lockstep with the central banks, expect to see variable and fixed rates continue to fall if we continue in this direction.

Did you hear population grew by over 1 million people last year in Canada? This is certainly an interesting development for Canada, as a population growth of over 1 million in a single year is very significant. It's worth noting that Canada has long been a destination for immigrants, and it seems that international migration is the primary driver behind this recent population growth. It will be interesting to see how this trend continues in the coming years and what impact it has on various aspects of Canadian society, such as the economy, healthcare, and infrastructure. 

This marks the first 12-month period in Canada's history where population grew by over 1 million people, and the highest annual population growth rate (+2.7%) on record since that seen for 1957 (+3.3%). The previous record population growth rate in 1957 was related to the high number of births during the post-war baby boom and the high number immigration of refugees following the Hungarian Revolution of 1956 - however this did not break the 1 million mark. The reason behind Canada's record-high population growth is definitely different, since international migration accounted for nearly all growth recorded in 2022 (96%).

How will the government deal with this? According to CMHC Canada needs to build 3.5M additional homes (over and above current projections) by 2030 in order for housing to be affordable again  (500k per year!)  Our government's solution is the Housing Accelerator Fund. According to the National Housing Strategy this will be implemented in June 2023. A full two years since they were elected on that promise.

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