Daily use of the word ‘transitory’ seems so ten years ago, yet this was the buzzword keeping us warm & cozy just ten months ago.

Then a Russian storm blew into the Ukraine, freezing up supply chain recovery, and within 90 days inflation here bolted to 7.7% from an already troubling 5.7%.

Inflation numbers have eased since, the trend reversing, but not far or fast enough for the Bank Of Canada.

The Bank Of Canada (BOC) over the past few weeks has repeatedly stated an unwavering commitment to aggressively bring inflation back to 2%.

They don’t care about you.

They don’t care about me.

The BOC does not care about short term impact on mortgage payments.

The BOC cares about one thing;

The 2% inflation target

Why 2%?

Why not 4%, or 1%, or 3.14%?

It’s too late to debate the why of the figure.

It’s too late to consider changing the target number.

The BOC is firmly locked on the 2% target.

Very firmly.

To be fair, the BOC has made seemingly ‘firm’ statements in the past, only to abandon their plans quickly in the face of global instability.

This time is different, because said global instability eliminated the word ‘transitory’ from their vocabulary, and this from the inflation conversation.

Transitioning halted.

A freeze has set in on the way back to full supply chain production and integration.

Thus the BOC is laser focused on one thing only; the 2% target.

I am repeating this message, because it is the core message.

Why?

Let me buy you a coffee

Take a $1.00 cup of coffee, in a 2% inflation world.

It takes 35 years for a $1.00 coffee to become a $2.00 coffee.

Unless it’s a Starbucks coffee.

In a 4% inflation world, the cup of joe doubles in 18 years.

Maybe we could handle that, maybe you, maybe me.

Fixed income folks might disagree.

In a 7% inflation world, the coffee doubles in just 10 years.

The 7% world coffee would hit $4.00 in 20yrs

The 2% world coffee at 20yrs is just $1.37.

Such is the power of compounding.

Inflation is compounding

We’re already stacking 7% gains (2022) on top of 4%+ gains (2021), and if we go into 2023 stacking 7% gains on top of 2022’s 7%’ers, which are stacked in top of 2021’s 4%’ers, we will have serious problems. More serious that some variable rate mortgage holders pain.

The BOC is effectively engaged in a battle against entrenched inflation.

Call this ‘anti-entrenched warfare’.

As this year has unfolded, my guts have twisted mightily with how far we’ve moved off of the (my) 2022 expectations back in Dec 2021.

These rate hikes are a new crisis, because inflation is a creeping crisis, and if it rolls on unchecked for another 6-12 months it’s that much worse.

The clock may seem to tick slowly when it comes to compounding, but it ticks on.

The clock ticks even more slowly when it comes to BOC policy meetings though – only 8 per year – which is why we’ve seen such outsize hikes in 2022.

Unprecedented moves lead to unprecedented counter measures.

And the year isn’t over.

0.75% here we come, once more if not twice.

Added perspective

inflation was well under 2%, under 0% even, up until April of 2021.

Should the BOC have bumped prime just a touch, just 0.25% back in April or May of 2021?

With the benefit of hindsight we say yes, but at that time… no.

The reality then is the reality today, and this part is harsh… but true, 50% or more of the inflation number we have today (6.9%), and more like 75%+ of the inflation figures a year ago, are supply chain driven – these inflation figures are not born out of (low) interest rates.

This is why when someone says ‘the BOC waited too long’ you can nod and walk away knowing that it’s not that simple at all. After all, if low rates were the cause, the high rates would be the cure. And yet…

High rates are a weak cure.

Why?

In addition to the supply chain piece, another 12% of the Consumer Price Index is housing. Housing costs are spiking upward because of the interest rate hikes. That sounds backwards because it is. That slice of the inflation figure is a vicious circle. Tough medicine forced on housing to try and drive the other 35% of the inflation number down hard to offset.

In other words, the BOC rate hikes only properly attack about 35% of the inflation number.

When you’ve a tool that only works on 35% of the problem what do you do?

You get stupidly aggressive with that tool.

A bit like shoveling your driveway with a 10” steel landscaping shovel. Something we know about in BC, because; why buy an actual snow shovel? And so there we are working in a frenzy with an imperfect tool, not doing a good job at all.

Yes, many Vancouverites give themselves actual heart-attacks shoveling that one-time snowfall, which is what the BOC is trying to give the economy. It’s OK, they’ll have the paddles (low rates) ready. It’s all they have, and hey… we need that car (with its summer tires) out of the driveway and onto the road. Oh ya, we know how that story ends.

So, where’s the BOC going to leave us given all this frenzied aggression with their one tool?

A tool that only hits 1/3 of the issue.

Will they pull the economy out of it’s spin in time?

Or are we all headed into a snow-covered curb, or worse?

We’re in BOC’s hands now.

BOC has taken the wheel.

The fact is every single recession has been triggered by overzealous central bankers applying too much cowbell.

Will this time be different?

Several economists predict a steady (interest rate-wise) 2023 with no further hikes after 2022’s two remaining meetings, followed by rate cuts of at least 1% come 2024.

Those cuts could leave people locking in today to long term 5%+ mortgages in a tough spot if they want to break out early… as 60% of CDN’s do.

All we can do is buckle up and hope this ride, and this storm, end soon.

I myself continue to ride the variable roller coaster, which admittedly feels more like a one-way bullet train these days.

Key Point; I acknowledge my privilege in being able to endure this rate spike. Easier options have been limited.

If you’ve managed not to overleverage yourself at those rock bottom rates, you too will get through this, some key ways to lead clients and fellow agents through this mess;

Be Kind.

Be Better.

Stay strong.

Stay focused.

Stay in the game.

P.S. I’ll be overleveraging myself at these 15 year record highs, but that’s another post for another year.

Stay tuned.

Stay awesome.

DW