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What impact can inflation have in 2024?

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The prices of a range of products could start to rise again, particularly as a result of the recent attacks in the Red Sea and the drop in water levels in the Panama Canal. (Archive photo)

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An acceleration in inflation this year could push the Bank of Canada to postpone the first cut in its key rate until next year, experts say.

We do not expect a downward trajectory in terms of inflation, says Sébastien Lavoie, chief economist of the Laurentian Bank. It's a bit of a roller coaster that continues.

I would even say a bigger and more dangerous roller coaster than in 2023.

A quote from Sébastien Lavoie, chief economist, Laurentian Bank

The economist is concerned about attacks in the Red Sea, which have caused global container shipping rates to jump in recent weeks, as well as falling water levels in the Panama Canal, which are forcing a reduction in the number of ships that can pass through it.

A concern shared by Alberta Central's chief economist, Charles St-Arnaud.

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This forces transport to be redirected on routes that are much longer, he notes.

Charles St-Arnaud estimates that the impact of these disruptions – which can push up the prices of certain goods, given transport costs or the scarcity of certain products – will depend on their duration.

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Canadian consumers could suffer the consequences, which leads Sébastien Lavoie to believe that the inflation rate could start to rise again until in April.

We should not have false hopes by thinking that it will go down to 2%, says the economist. He also points out that these factors linked to global transport rates could push the inflation rate, which was 3.1% in November, up to 4% next March.

Charles St-Arnaud instead considers the possibility that inflation will persist more than expected. Inflation may slow less quickly than expected, he said.

The Bank of Canada, in its most recent forecasts in December, still estimated that inflation could approach its target of 2% (New window) at end of the year.

Inflation in the United States was higher than economists expected in December, at 3.4% year over year. A more marked increase than the previous month (3.1%). Canadian data will be released on Tuesday, but economists predict that inflation may also have reaccelerated in Canada last month.

A lower inflation rate higher than expected could once again undermine consumer confidence, which is already at recessionary levels, according to the chief economist of the Laurentian Bank.

This is a risk that must be taken very seriously, believes Sébastien Lavoie, with reference to recent increases in transport costs and their possible impact on inflation and monetary policy.

And even if in our base scenario, we say that the Bank of Canada could very cautiously begin a rate cut in the summer, in June, what is currently happening in the Red Sea could postpone that until very late: after the American elections and, who knows, maybe even in 2025, he adds.

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Charles St-Arnaud believes that the board of directors will see the factors related to supply chains as temporary. (Archive photo)

Charles St-Arnaud, who worked as an economist at the Bank of Canada, thinks instead that the board of directors will see the supply chain factors as temporary. He still believes the first rate cut could be made in June.

The Bank of Canada will want to be relatively patient before starting to reduce its rates, estimates Charles St-Arnaud. This allows him to have more information, more data on economic activity before making his decision.

The price of a barrel of oil will also be a factor to watch this year, according to the chief economist of Alberta Central. A very sharp rise in energy prices, if the situation in the Middle East deteriorated, would have much more impact from an inflationary point of view, he notes.

During his press conference in December, the Governor of the Bank of Canada, Tiff Macklem, emphasized that the global economy was volatile and that central banks needed to demonstrate great flexibility in this context.

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In the press release of its most recent decision, the Bank of Canada has also kept the sentence according to which it remained ready to increase the policy rate again if necessary, even if the Governing Council judged that the probability that monetary policy would be restrictive enough to achieve the inflation target had further increased.

For the moment, she is refusing to talk about when she might start lowering her key rate.

It is certain that if inflation, as it seems to be the case, galloping upwards this winter, those who expected rate cuts to get into the real estate market this spring will have to wait until the summer, the fall and perhaps even even longer than that, notes Sébastien Lavoie.

Scotiabank's chief economist, Jean-François Perrault, fears that the enthusiasm of buyers hoping to benefit from rate cuts will cause them to take action prematurely.

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Although home prices have fallen a bit from the peaks reached during the pandemic, the combination of rates of Elevated interest and buyers waiting for prices to fall further has created a slow sales market across most of the province, according to several industry data. (File photo)

One of the problems for the Bank of Canada is that if people anticipate declines too much and relaunch themselves in the real estate market at the start of the year or in the spring, the effect will be too stimulating for the economy and the Bank of Canada may be forced to delay the cuts or do less, says Jean-François Perreault.

The Bank of Canada will publish its first decision and its first monetary policy report of the year on January 24.

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