Hard landing will slow inflation to target by late 2024 | Canada Up Close

Hi, I’m Cassidy Rheaume, Associate Economist at Oxford Economics. Today I will be discussing the outlook for inflation in Canada. In our view, the Canadian economy has slipped into a moderate recession that will create slack, ease price pressures and along with weaker global oil and food prices, bring headline CPI inflation back to the 2% target by late 2024. In contrast, many other forecasters, including the Bank of Canada, still anticipate a soft landing for the Canadian economy, with inflation returning to target later.

We used our global economic model to assess the prospects for inflation under a soft landing scenario like the Bank of Canada’s.

We find that should Canada’s GDP remain stalled through early 2024 and not contract as we expect, then CPI inflation would be higher and remain above the 2% target until late 2025, a year later than our baseline recession forecast.

The labor market would be more resilient in a soft landing, with a smaller rise in the unemployment rate to 7% compared to 7.5% in our baseline recession forecast.

As a result, hourly wage growth would be firmer and take longer to slow to a range consistent with the Bank of Canada’s 2% inflation target. Importantly, in contrast to our baseline recession forecast, which expects the Bank of Canada will hold the policy rate at 5% until June, when it will begin to gradually ease. Higher inflation and a soft landing would likely prompt the Bank of Canada to end its current pause and resume hiking.

Our soft landing scenario suggests that the bank would raise the policy rate by a further 50 basis points from its current 5% level to 5.5% by mid 2024. While the bank would begin to slowly ease in late 2024, the policy rate would remain higher than our baseline until 2026.