*Updated* Ongoing Bank of Canada Benchmark Rate Announcements

[Firebot]

Originally Posted by opendoor

That's the United States.

Well aware. I've been posting both Canada and US data as both are in very similar situations right now and running parallel policies.

They must be using a narrower definition of M2. Statistics Canada's numbers for M2 gross show month-over-month growth in every month this year. But regardless, a one off monthly drop doesn't mean much in the wider picture. There has only been a single yearly drop in M2 in the last 50 years in Canada, so the money supply will continue to grow in 2022, just at a much slower rate.

Bolded is incorrect as well. See April 2022 direct from Stat Can

https://www150.statcan.gc.ca/t1/tbl1...pid=1010011601

Quantitative tightening is where the central bank rolls off its assets. It doesn't necessarily mean a contraction in the money supply, it just means that the central bank is reducing its holdings, which has the net effect of reducing the liquidity of private banks (which makes lending more expensive and stricter).

Holdings is money supply.

Not sure why you trying to prove me wrong on easily verifiable statements or being contrarian for the sake of being contrarian.

[CliffFletcher]

The Economist doesn’t think U.S. inflation is transitory - rather, the economy is overheating, and the interest hikes will need to keep coming.

The perils of wishful thinking

To fix America’s inflation problem, the Federal Reserve must go big

… Strip out volatile food and energy prices, though, and underlying “core” inflation is still roaring. Prices rose at an annualised rate of 7.4% in August, exceeding economists’ forecasts and well above the Fed’s target for overall inflation of 2%. It is tempting to sift through the components of the inflation basket in an endeavour to find signs of cooling. At one point inflation was driven by stratospheric prices for second-hand cars and gummed-up supply chains, as locked-down Americans splurged on goods. These pressures have since eased. The increases today reflect a surge in the prices of some services, such as housing, which could eventually slow down, too.

Yet when underlying inflation has been this high for this long the simplest explanation is the most obvious, no matter what happens to individual components: the economy is still overheating. The effects of generous fiscal stimulus, which stoked demand during the pandemic, linger today. According to Goldman Sachs, a bank, households in aggregate are still sitting on more than $2trn in excess savings accumulated during lockdowns, equivalent to 10% of annual gdp.

A tight labour market is buoying demand still further. At 3.7% the jobless rate remains remarkably low; there are still around two vacancies for every unemployed person. The severe shortage of workers has led to heady wage growth, which in turn has sustained consumer spending. By one gauge, median earnings in America are rising by 7% at an annualised rate, a pace not seen in at least the past two decades. Whereas inflation in Europe should plunge as the energy shock fades, American inflation, rooted as it is in home-grown demand, is far stickier...

[PeteMoss]

Originally Posted by opendoor

Switzerland has structural issues that have seen them move in and out of deflation over the last 20-25 years, which isn't really a good thing given that they have negative interest rates. The one positive is their inflation stays relatively low during periods like now, but the rest of the time it's a bad thing (similar to Japan).

For the others, it mainly comes down to energy. Most of France's electricity and a good portion of their heat (at least until half their nuclear fleet went offline) was domestically produced and not subject to rising gas prices. Whereas the Netherlands is almost totally reliant on fossil fuels for energy.

France also has a price cap on energy cost increases which is the big driver of inflation. The government is paying billions of dollars to keep inflation low.

[opendoor]

Originally Posted by Leondros

Don't be ridiculous - inflation adjusted we would only need $160 oil to mirror the '78 - '84 spike.

https://inflationdata.com/articles/w...art-8-2022.png

How would increasing the price of oil by 90% (current price -> $160) match the 1,100% price increase in oil they saw from the early '70s to the early '80s ($3.50 -> $39)? The equivalent now would be the price going up 11x to ~$900.

[opendoor]

Originally Posted by Firebot

https://www150.statcan.gc.ca/t1/tbl1...pid=1010011601

OK, you've got me. There was a single month with a tiny drop (likely due to seasonal adjustments), at which point it started increasing again. In the end, there will be more money at the end of the year than the beginning, just as there is every year.

Holdings is money supply.

What? No it isn't. The Bank of Canada owns assets, the vast majority of which (86%) are Government of Canada bonds which they're slowly rolling off as they mature and aren't repurchased. But their holdings only represent about 15% of Canada's M2+ ($431B of $2.9T).

So they'll continue to roll off their assets over several years (the current pace is about $100B a year), but there will still be new money created in that period leading to a growth in the money supply. The exact same thing happened to a lesser degree after 2008:

Bank of Canada Assets:

January 2009: $79B
January 2010: $71B (10% drop)
January 2011: $61B (14% drop)

Canada's M2+:

January 2009: $1.24T
January 2010: $1.31T (5.8% increase)
January 2011: $1.36T (4% increase)

So over 2 years the Bank of Canada's assets were reduced by ~23% while the money supply increased by ~10%.

[Leondros]

Originally Posted by opendoor

How would increasing the price of oil by 90% (current price -> $160) match the 1,100% price increase in oil they saw from the early '70s to the early '80s ($3.50 -> $39)? The equivalent now would be the price going up 11x to ~$900.

Where was pricing when we started to ramp up inflation? If you are going to start at the $3.50 it would be disingenuous not to start at the $45 - $55 per barrel we were hovering around prior to COVID. I won't cherry pick the crash as that wouldn't be appropriate either. You also have to remember that the spot market wasn't invented for oil and gas until the late 70's. There really wasn't a market for oil that wasn't controlled by the 7 sisters (~95% of all oil was purchased by them and was thus not reflected of fair market price). All I am saying is I would caution you against drawing parallels between the two because the late 70's/80's was entirely the wild west with Marc Rich at the helm.

[opendoor]

Originally Posted by Leondros

Where was pricing when we started to ramp up inflation? If you are going to start at the $3.50 it would be disingenuous not to start at the $45 - $55 per barrel we were hovering around prior to COVID. I won't cherry pick the crash as that wouldn't be appropriate either. You also have to remember that the spot market wasn't invented for oil and gas until the late 70's. There really wasn't a market for oil that wasn't controlled by the 7 sisters (~95% of all oil was purchased by them and was thus not reflected of fair market price). All I am saying is I would caution you against drawing parallels between the two because the late 70's/80's was entirely the wild west with Marc Rich at the helm.

$3-3.50 was the price for pretty much the entire decade before inflation took off, so it's a pretty appropriate starting point. The equivalent to today would be something in the $70-80 range. But even if you exclude the pre-2014 period (fair enough) and use $50 oil as the baseline, you're still looking at over $500 oil to match the price increases they saw over the '70s and early '80s.

The main issue with the '70s was it kept going up and up and up year after year, which is a big reason why inflation kept going up. It tripled in 1974 in then it went up about 50% in the next few years with no relief, before nearly tripling again in 1979-1980. All that compounding growth led to significant inflation in energy prices. By contrast, our current prices are right in line with what they were 10-15 years ago.

So they're still high, but we're not seeing the unending growth in prices that happened back then. The monthly average oil price has dropped about 25-30% in the last few months, whereas I don't think there was a single point between 1974 and 1982 where monthly oil prices dropped more than 10% from peak to trough.

[Leondros]

Originally Posted by opendoor

$3-3.50 was the price for pretty much the entire decade before inflation took off, so it's a pretty appropriate starting point. The equivalent to today would be something in the $70-80 range. But even if you exclude the pre-2014 period (fair enough) and use $50 oil as the baseline, you're still looking at over $500 oil to match the price increases they saw over the '70s and early '80s.

The main issue with the '70s was it kept going up and up and up year after year, which is a big reason why inflation kept going up. It tripled in 1974 in then it went up about 50% in the next few years with no relief, before nearly tripling again in 1979-1980. All that compounding growth led to significant inflation in energy prices. By contrast, our current prices are right in line with what they were 10-15 years ago.

So they're still high, but we're not seeing the unending growth in prices that happened back then. The monthly average oil price has dropped about 25-30% in the last few months, whereas I don't think there was a single point between 1974 and 1982 where monthly oil prices dropped more than 10% from peak to trough.

Again - it was in that banded $3 - $3.50 range because it wasn't a free market. It was until the creation of the spot by Marc Rich in 1976 - 1977 that oil began to bypass the 7 Sisters and truly become a tradeable commodity. Before that it was controlled by the large oil and gas companies almost exclusively.

I am sure I don't have to tell you that the late 70s and early 80s are not good proxies to base any kind of analysis on in today's market as the Iranian Revolution turned the whole world upside down in terms of energy security.

Regardless, if I take a step back my point is that we don't necessarily need to see a 10 bagger on oil prices in order to severely impact inflation going forward. We are in a much different time where much of the world has enjoyed cheap energy prices and a larger portion of the world has developed. That, coupled with globalization has a magnifying effect for the price of services and goods. My argument is we are much more sensitive to increase in energy costs than we were 40 years ago so a 2 - 5 bagger on oil from $50 is going to have an equal or greater impact than in the good old days. It remains to be seen how high energy goes but the direction we are heading - the lack of investment in production, the lack of technologies to make up the delta, the lack of electrical grid infrastructure, and the inevitable increase in demand make high oil prices virtually inevitable for most of this decade.

[Mr.Coffee]

Originally Posted by opendoor

We would need $800-1000 oil within the next 7-8 years to match the level of energy inflation they saw in the '70s and early '80s. That's not going to happen. We're paying less for oil now than we were 10 years ago and are currently paying the same price as 15 years ago.

Ah you mean real dollars, yes that makes sense. But Oil is going to go up for sure. No question at all actually based on all the data out there and just generally demand levels vs. supply and the fact that all US shale plays are now targeting tier 2/3 acreage.

[Mr.Coffee]

Originally Posted by Leondros

Again - it was in that banded $3 - $3.50 range because it wasn't a free market. It was until the creation of the spot by Marc Rich in 1976 - 1977 that oil began to bypass the 7 Sisters and truly become a tradeable commodity. Before that it was controlled by the large oil and gas companies almost exclusively.

I am sure I don't have to tell you that the late 70s and early 80s are not good proxies to base any kind of analysis on in today's market as the Iranian Revolution turned the whole world upside down in terms of energy security.

Regardless, if I take a step back my point is that we don't necessarily need to see a 10 bagger on oil prices in order to severely impact inflation going forward. We are in a much different time where much of the world has enjoyed cheap energy prices and a larger portion of the world has developed. That, coupled with globalization has a magnifying effect for the price of services and goods. My argument is we are much more sensitive to increase in energy costs than we were 40 years ago so a 2 - 5 bagger on oil from $50 is going to have an equal or greater impact than in the good old days. It remains to be seen how high energy goes but the direction we are heading - the lack of investment in production, the lack of technologies to make up the delta, the lack of electrical grid infrastructure, and the inevitable increase in demand make high oil prices virtually inevitable for most of this decade.

You forgot to add to your list extremely shortsighted and obviously idiotic poor policy decisions and huge issues with public perceptions on required energy and then not having proper transition strategies in place (or in time).

[Leondros]

Originally Posted by Mr.Coffee

You forgot to add to your list extremely shortsighted and obviously idiotic poor policy decisions and huge issues with public perceptions on required energy and then not having proper transition strategies in place (or in time).

That was captured in lack of investment and lack of appropriate technologies

[bizaro86]

Originally Posted by Leondros

My argument is we are much more sensitive to increase in energy costs than we were 40 years ago so a 2 - 5 bagger on oil from $50 is going to have an equal or greater impact than in the good old days.

I disagree the economy is more sensitive to oil prices, quite the opposite imo. The percentage of global GDP that is oil related has been constantly declining for years. Both because improvements in technology have kept prices low and because efficiency gains have been significant. Also, the change in industrial composition has been significant as well - the industries we had in the 70s all still exist and efficiency has gone up, but most of the new industries created since then (eg, everything tech) have very low levels of oil as inputs.

[Azure]

Originally Posted by Fuzz

It's easy to go throwing all the blame at the BoC, but that doesn't really explain why so many of our peers are experiencing similar levels of inflation, so it rings a bit hollow to me. Did they all make the same mistakes, or was it unavoidable?

Didn't just about everyone act the same way?

I mean I get the BoC saying the pandemic spending went on too long, but I think they were a bit slow to respond as well, but it seems like every country more or less responded the same way.

My issue right now is the race to rise interest rates, thinking it will solve inflation, when I think much of the inflation is driven by food issues and cost of fuel, both of which are affected by the war in Ukraine.

I suppose when you blow up the home building market by driving up interest rates very quickly, it will ease the supply chain, which should drop shipping costs. But at the same time we have high, high immigration levels, and we need to keep building homes to support them.

Their strategy seems kinda short sighted.

[Azure]

Originally Posted by opendoor

Mostly unavoidable. Central banks responded to a significant crisis by ensuring liquidity, which in Canada's case meant buying up government bonds. This led to more liquid money floating around (primarily in the form of supports for businesses and people) and also a drop in interest rates, as more demand for bonds drives the yield downwards. That can lead to inflation over time, particularly when there's extra money being introduced during a period of low productivity, but not always. 2007-2009 saw similar growth in monetary aggregates with no real inflation. But the alternative (widespread bankruptcies, exceptionally high job losses, etc.) was much worse, so it was really the best of several bad options (particularly given that no one could predict the future at that point in time).

The funny thing is, no one who is criticizing the central banks seems to be suggesting a viable alternative solution. Don't increase the money supply? Then we likely have a liquidity crisis and significant economic harm. Raise interest rates sooner? Yeah, that might have helped, but raising rates is what they're complaining about. Begin quantitative tightening sooner? That's going to increase rates and reduce economic growth, which again is what people seem to be complaining about.

When the pandemic hit, and travel stopped, a LOT of money which was otherwise budgeted for vacation, travel & entertainment got sunk into staying at home projects such as renovations or even new housing starts. Sure the supply chain was an issue because of actual shutdowns, lockdowns, quarantine stupidity, etc....but the housing industry, which drives a big part of the Canadian economy, was dealing with insane demand. Which led to prices increasing like crazy. From there on everything from rail to trucking, etc got more expensive, which of course will affect food costs, fuel costs, etc.

To me, despite agreeing with the increases in interest rates, it feels like the BoC is just raising, raising, raising without realizing that this is more than just too much liquid in the market, need to reduce problem. Same thing with the US Fed.

IMO we need to work on improving logistics to help deal with demand problems. If there is still a shortage in any supply chain, it will continue driving inflation REGARDLESS of what the BoC does. And given immigration levels, I do not see much of a slowdown in the housing market.

10% of our GDP is somehow tied up in housing & real estate, and continued demand will keep those costs high.

Secondary home sales are dropping, but it still costs WAY more than usual to build new.

[Leondros]

Originally Posted by bizaro86

I disagree the economy is more sensitive to oil prices, quite the opposite imo. The percentage of global GDP that is oil related has been constantly declining for years. Both because improvements in technology have kept prices low and because efficiency gains have been significant. Also, the change in industrial composition has been significant as well - the industries we had in the 70s all still exist and efficiency has gone up, but most of the new industries created since then (eg, everything tech) have very low levels of oil as inputs.

Agree to disagree on that one. Ever since the West became reliant on China and co for virtually everything transportation and shipping all play a more pivotal role. Add in transfer pricing where raw materials are from
Africa, manufacturing in China, packing in the UK and final product in North America and you can see that fuel plays a far larger role than it did even 30 years ago. Adding to that, the fact that plastics and petrochemicals are growing even more important…

[Zarley]

Originally Posted by opendoor

What a useless chart. "Here's 20 countries from 1980 to drag the average way up." If you look at the more recent ones you have:

Ireland: Went above 5% in 2000, but dropped to 3.49% by 2003. Yes it took 9 years to finally get under 2%, but they were in the 2.5-4% range basically that entire time from 2003-2008.

United States: Went above 5% in 1990, but dropped to 3% by 1992 and stayed low.

Switzerland: Briefly went above 5% in 1990 and 1991 but dropped quickly and was near deflation territory by 1994.

Germany: Went over 5% in 1992 after reunification but was just over 2% 2 years later.

Netherlands: As near as I can tell, they never went above 5% in the early '00s, but in any case they were back to 2.1% 2 years later.

So outside of the energy crisis in the 1970s, it has taken countries from that list about 2-3 years to get back in the target range which is probably a reasonable expectation for us now.

I admire your optimism and I hope you’re right, however given the global lack of investment in oil and gas exploration over the last 7 years I believe we are going to see a prolonged period of significantly elevated energy prices that will continue to fuel inflation. I don’t think we’ll see the same magnitude as Volker, but the Fed is likely going to have to get more aggressive to slay the inflation beast that has been created.

[opendoor]

I don't know, I think people are underestimating just how much had to go wrong and how many poor decisions had to be made to drive the '70s inflation for that long.

Just to put things in perspective, between late 1971 and early 1983 (a more than 11-year period) there was only 1 time where the month-over-month inflation was negative in Canada. That was September 1978 where MoM inflation was -0.3%. The next times that happened after that were in January 1983 (-0.2%) and December 1990 (-0.1%). In contrast, we had -0.3% MoM inflation in August, which was the 2nd time in the last 9 months it was negative.

In the US, over that same period in the '70s and early '80s there wasn't a single month where the seasonally adjusted CPI declined. Yet they saw it decline (very slightly) in July of this year.

So both countries went more than a decade in the '70s and early '80s with essentially zero monthly declines in the CPI, but a few months into quantitative tightening now and they're already seeing what would have been unthinkable back then. Canada has already seen as many negative CPI months in the last 9 months as it saw in the more than 15 year period between 1973 and 1989.

[GGG]

One thing about current US inflation is the way they do rental costs takes about 6 months to factor in. So their core inflation remains high driven by housing rents which are currently dropping but won’t be reflected until year end.

[DoubleK]

Originally Posted by Firebot

They are likely overcorrecting yes. But that's my argument and issue with last year's BoC policies.

Isn't that a bit of hindsight? The risk of hiking too early is worse in my mind, so I don't think they were wrong for acting when and how they did. Do you honestly believe a 25 bps hike in Nov 21 would have led to a vastly different outcome?

The biggest thing that nobody is talking about is QT, I find that troubling.


Edit: sorry for the Necro quote

[Leondros]

Equity markets are starting to panic a bit as a result of this. Oil is down today big time as well. It will be interesting to see if this is the start or just a blip.

How many more hikes until we see the housing market plummet and people start handing in their keys 80's style to the banks? That would be the start of a very systematic shock for the whole financial system.