Mortgage interest costs surge 28.5% pushing inflation higher in April

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First increase in consumer price index since June 2022

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Soaring mortgage interest costs and higher rents in April helped drive the first rise in headline consumer inflation since June 2022, the latest data from Statistics Canada shows.

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The consumer price index (CPI) figures released May 16 revealed a 28.5 per cent increase in mortgage interest costs in April compared to a year earlier. That’s the tenth consecutive month that mortgage interest costs have risen and the fourth straight month that year-over-year Increases have topped 20 per cent.

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“Someone who took a three-year mortgage in mid-2020 will now be facing a huge increase in their monthly payments when they renew at 2023 mortgage rates, and that gets picked up in this CPI component,” said Avery Shenfeld, chief economist at CIBC Capital Markets.

“These shelter costs are a factor in the elevated inflation rate, but not the only factor,” he added, noting that food is “another hot spot.”

Shelter represents more than a quarter of the expenses profiled in the CPI, according to Statistics Canada. Shenfeld pegged it at nearly 30 per cent.

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The increase in mortgage interest costs is accelerating, according to the StatsCan figures, with April seeing the largest single-month increase among data captured since January 2020.

Both rental and owned accommodations are covered in this component of the consumer price index and Statistics Canada suggested the higher interest rate environment may be stimulating higher rental demand and contributing to higher rents, which rose 6.1 per cent in April 2023.

Total shelter costs rose by mid-single digits in each of the past the past two months, up 4.9 per cent in April and 5.4 per cent in March.

Shenfeld said that while the Canadian economy “is still too hot” to get inflation back to two per cent, employment and wage trends appear to be offsetting the higher costs, including housing.

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“Job and wage growth are ample enough so that Canadians are paying six per cent more for rent, and still have money left to go out to dinner and cover rising food costs,” he said.

Mortgage interest cost increases should recede as renewals work their way through the system at higher rates, he said, but that may not be sufficient to remove the pressure of higher shelter costs on inflation.

“While mortgage interest costs should decelerate once we are through refinancing more of the maturing mortgages, we will need to slow the economy and income growth, as well as build a lot of rental properties, to cool the rent inflation component,” he said.

Rob McLister, a mortgage analyst and strategist, said the shelter trends aren’t surprising given the “significant” rise in mortgage rates in April from a year earlier.

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In addition, he said “rents have been surging for two years thanks to purchase unaffordability and immigration.”

However, he said he finds new data related to resale prices more interesting, suggesting they have “bottomed out,” which could be inflationary.

“The selloff in home prices has had a deflationary impact on CPI. But now, with the resale price index bottoming, we can no longer count on housing to help inflation get back to target,” he said.

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