NO Cuts (or Hikes): Bank of Canada

Thanks for clicking. Canada's inflation

data came in hot in March as expected

with higher gas prices pushing headline

to 2.4%. And that data comes as Bank of

Canada Governor Tiff MLM assured

reporters on Friday that the central

bank doesn't want to hike too early or

too late on oil driven inflation.

Meaning so long as the central bank gets

things just right, we have nothing to

worry about.

>> We're all fine. Everyone's fine. Yeah,

Tesla see today there are some early

warning signs that we can identify that

will tell us that broad-based inflation

is coming. We don't necessarily need to

wait for the government to tell us what

to do. So, what I want to do today is go

over Canada's inflation data for the

month of March. Take a look at some of

those early warning signs for general

inflation and then discuss what to look

for next. Speaking next, the Bank of

Canada is making its next interest rate

announcement next week with a press

pageant held thereafter and we'll

obviously have an update out on both on

this channel. Make sure you click like

and subscribe if you want to get those

updates. But for now, let's get into

this data.

Under the data, as mentioned, inflation

came in hot on higher gas prices with

headline coming in at 2.4%. The biggest

driver was obviously those higher gas

prices with year-over-year coming in at

2.2 where they excluded. Food inflation

not good. Not good at all, increasing

from 4.1 to 4.4 with vegetables up to

7.8. In fact, the majority of the stuff

that we really need was all up in March

with gas, food, and cars all pushing the

CPI up with natural gas, house prices,

women's clothing, and furniture all

pushing the CPI down. So, yeah, so long

as you don't have to leave the house or

eat, you're all set.

>> Doesn't that count for something?

With that said, measures of core

inflation, those measures the Bank of

Canada looks to when deciding interest

rate policy, appear to be holding or

getting better with CPI median holding

at 2.3 and CPI trim dropping from 2.3 to

2.2. Though, it is also worth noting

that month overmonth measures of core

inflation are a bit less rosy, seeing

the biggest spike that they've seen

since the summer of 2022. That is just

one month's data, though definitely

something we'll continue to keep an eye

on. So, headline inflation coming in hot

based off higher oil prices. No real

surprise there. Food inflation also

coming in hot, though. Again, no real

surprise there. Measures of core

inflation, those broad-based measures

appear to be holding. And while headline

inflation is up, the Bank of Canada is

trying to exert calm. Noting that the

bank doesn't want to jump too early,

raise rates, and hurt the economy, while

at the same time it also doesn't want to

come to the table late, allowing

inflation to take hold and get

entrenched. You're learning so many

important things

and I'm so proud of you.

>> Which obviously makes sense. The economy

is, as David Rosenberg put it,

sclerotic. Meanwhile, we have persistent

worries about inflation stemming from

the war in Iran. And while the central

bank has said over and over again it

plans to look through current increases

in inflation, ignore this headline,

inflation stemming from gas prices. We

don't necessarily have to wait for the

government to tell us where things are

headed. Do you think that's true? And on

that we can look to some of the very

early warning signs of inflation which

we've discussed so much before on this

channel the money supply as inflation as

per Milton Freriedman is always and

everywhere a monetary phenomenon and the

Bank of Canada has concurred with this

in the past noting that the broad money

supply is a good leading indicator of

inflation. So, as the money supply

increases and the amount of goods stays

relatively unchanged, the price of those

goods, the price of those services are

going to increase. But remember, money

isn't just created when the central bank

prints it. It's also created when the

banks, the big banks extend new loans.

So, you need a mortgage, you go to the

bank, your bank rep punches a few digits

into the computer, $400,000 gets

created, you take that 400k, you go buy

your new house. That's $400,000

additional dollars. now in the system.

So at this point, an increase in the

number of dollars in the system relative

to that of the amount of goods available

will increase inflation and those

dollars get increased by the extension

of new loans by commercial banks or when

the Bank of Canada prints them. On the

other hand though, if more money isn't

being created and stuff just costs more

money, say like oil, well then the

existing stock of money just leaves one

place and goes to the other. people give

less money to Starbucks and more money

to the gas station. No new money being

created. So, at least initially, no

inflation. And that's the way the

central bank is going to be looking at

current inflation at the inflation we're

seeing coming out of the Middle East.

That at least for now, you'll put more

money towards gas and less money towards

beer and popcorn.

>> You stupid hicks.

>> As such, if we're trying to ascertain

where broad-based inflation is heading,

we want to look at the rate of money

creation. at the rate at which new money

is entering into the system. And

remember, this isn't just theory. This

also works in practice. In fact, it has

worked in practice time and time again.

This is how much Canada's broad money

supply was growing one year prior to the

Bank of Canada raising rates in February

of 2022. Here is the money growth in the

70s, 80s, and 2020s. All coinciding with

the biggest bouts of inflation the West

has seen in the past 50 years. In fact,

if we look at each time the central bank

undertook the biggest interest rate

increases in the 70s, early 80s, early

90s, and 2022, all were preceded by big

increases in year-over-year money

growth. Now, it's also worth noting that

the velocity of money, that is the rate

at which currency changes hands, is also

an important part of the conversation.

Though, I don't want to get too much

into the weed, so we'll leave that

discussion for another time. But for

now, we know that both in theory and in

practice, money supply growth will tell

us where inflation is heading. As such,

where is money supply growth sitting

right now? Well, as of February, M2

money growth was sitting at 5.9%.

Right about where it should be, actually

maybe a little bit under it. Now,

obviously, the new aggregates, the

aggregates that we really want, aren't

out yet. The aggregates from post

February 28th. Obviously, when oil

prices did this, because what we want to

know is, are people borrowing? Are new

loans being created to pay for this

increase in gas prices? Are they putting

the couch on the credit card while their

paycheck pays for the gas? Because if

that's the case, then the central bank

is very much going to have an issue with

it in the medium to longer term and will

seek to restrict the extent to which

that option is available to consumers.

And make no mistake, though, the central

bank says it does not target the money

supply when deciding monetary policy, it

sure does look to the monetary

aggregates when gauging it. It just

can't say so explicitly, as if it

admitted it, then it would have to admit

that it always knew that, and then would

have to admit that it lied in 2020. It

duped the population when it said near

zero when the money supply was doing

this. Now, obviously, it's not just the

money supply that's going to be watched

by the central bank. They're going to be