It’s time for the Bank of Canada to kick shelter inflation to the curb

Pulling inflation down from its lofty 8.1 per cent peak has been a tough slog for the Bank of Canada and borrowers alike. The central bank’s aggressive 10-part interest-rate hiking cycle has put extreme financial pressure on Canadians as the cost of living has surged, with everything from food to mortgage costs up by double-digit percentages since 2021.

The recent Consumer Price Index reading for February, however, shows real progress, with an under-consensus rate of 2.8 per cent and downward movement among the all-important core measures. That is indeed music to the central bank’s ears, and its Governing Council members are surely patting each other’s backs in the knowledge that all those hikes were worth it.

The bank felt these new core measures would better track long-term changes in inflation, be less volatile overall and better relate to the underlying drivers of price increases.

“ that the economy has flatlined since last spring, the BoC’s preferred core metrics have become less connected with the economic cycle due to the influence of structural factors related to housing,” Mr. Orlando writes. “And the fact that one sector is driving this disconnect means that the current inflation metrics aren’t doing a good enough job at guiding monetary policy for the broad economy.

The bottom line is, the Bank of Canada’s current inflation gauge doesn’t accurately capture – or counter – the phenomenon of the country’s overheated housing market. While overly accommodative interest rates certainly pose a risk of too-quick price increases, other factors such as rapid population growth and a lack of missing middle and affordable rental housing are also largely to blame – catalysts outside the influence of monetary policy.

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