Don’t look now but rental inflation is surging. This is probably no surprise to most Canadians who have likely witnessed rampant rent inflation over the past couple of years. However, it appears it is finally showing up on the Bank of Canada’s dashboard.
Thanks to a new approach for estimating the rent component of the CPI, which aims to more accurately reflect the real world, October’s CPI data showed rent inflation surged to 3.7%, the highest rate since 1991.
Keep in mind, rent inflation is obviously much higher in large metro cities like Vancouver & Toronto. Further, per the Capital Economics team, the rent CPI represents the average rent for every renter household rather than the actual market rate. So if only 5% of people are moving and face the “real” rate of say 20% y/y, and yet rents for everyone else remain unchanged, then CPI rental growth will only be 0.05 * 20% =1%.
It’s also worth noting that the rent index only represents around 6.24% of the entire CPI basket. In other words, rents make up a small percentage of the Bank of Canada’s overall inflation gauge. The Bank of Canada suggests overall inflation across Canada was just 1.9% in October.
Carolyn Wilkins, the number 2 at the Bank of Canada suggested the recent round of data should keep interest rates on hold for now. “With vulnerabilities high and inflation close to target for more than a year, we said at our most recent interest-rate decision that taking out insurance wasn’t worth the cost at that time.”