No Shelter from Shelter Inflation in Canada

One of the key takeaways from the Bank of Canada’s January 2024 Monetary Policy Report is that shelter inflation is likely to be the single most important driver of year-over-year price growth in the first half of 2024. According to our analysis, higher-for longer shelter inflation will be the dominant driver of headline Canadian inflation for the foreseeable future. The sustained high pace of shelter inflation is expected to be almost entirely driven by rising mortgage interest cost.

To ensure total CPI inflation gets back to the Bank’s 2% inflation target despite sustained high shelter inflation, growth in other price categories must be lower than in the past. Monetary policy has the most direct impact on interest-rate-sensitive parts of the economy. The drag from high interest rates will continue to ripple through the economy, weighing on the labour market and economic activity more broadly.

As the Canadian economy tips into recession in the first half of 2024, the resulting economic weakness should help to apply additional downward pressure to non‑shelter core CPI inflation. Fortunately for the Bank of Canada, food and energy prices look to be cooperating as well.

All told, while shelter inflation is expected to remain elevated for the foreseeable future, other drivers of inflation are likely to offset that strength and help to bring inflation back to around 2% by the end of 2024.