Central bankers captain enormous economies that are kinda like supertankers.
Fun fact about supertankers: they have massive momentum and can take three to ten miles and 15 minutes to stop.
Economies are similar. They’re so big that our trusty monetary skippers are sometimes unable to steer away from economic icebergs fast enough.
That may be happening as we speak.
The iceberg ahead is inflation , and the Bank of Canada and U.S. Federal Reserve (Fed) seem to be hoping it melts before their economies ram right into it.
The reality of our situation
Here’s what the latest gauges are saying about annual inflation rates and recent one-month moves. U.S. data is included since the Bank of Canada can’t pretend its southern neighbour doesn’t exist when making policy:
Canadian inflation: 2.4 per cent, up 0.6
U.S. inflation: 3.3 per cent, up a whopping 0.9 in one month
Canadian gasoline: up 21.2 per cent (largest monthly increase on record)
Bank of Canada April inflation estimate: three per cent (due partly to base effects from the carbon tax removal in April 2025)
Business one-year inflation expectations: 3.8 per cent, up 0.8
Business two-year inflation expectations: 3.4 per cent, up 0.6
University of Michigan one-year inflation expectations: 4.7 per cent, up 0.9 (U.S. data)
Cleveland Fed nowcast core PCE: 3.28 per cent
Canadian average core inflation: 2.25 per cent, down 0.05
Canadian producer prices: 7.8 per cent, up 2.2 (in one month!)
U.S. core PCE inflation: 3.2 per cent, up 0.2 (a more than two-year high)
U.S. producer prices: 4.0 per cent, up 0.6 (highest in three years)
U.S. five-year breakeven inflation rate: 2.7 per cent, up 0.1 (the market’s rough expectation of average annual inflation over the next five years)
U.S. trimmed mean inflation: 2.4 per cent, up 0.1
That’s a lot of ups.
The last one, trimmed mean, happens to be the favoured inflation gauge of incoming Fed chair Kevin Warsh, the soon-to-be world’s most powerful banker. It’s worth remembering, since the Fed chair’s preferred yardstick tends to become everyone else’s.
Like most core measures, the trimmed mean will need more time to fully reflect soaring energy costs. Barring a major drop in crude prices this quarter, however, it’s coming.
And if traders see U.S. core measures rise much more, batten down the hatches because U.S. government yields could go vertical and Canadian rates would likely tag along.
Meanwhile, the Bank of Canada has pledged to government and citizens that it’ll wrestle inflation back to two per cent.
There’s just one annoying detail: Its supposedly preferred measure, average core inflation, hasn’t nailed two per cent since Tom Brady won his seventh Super Bowl (in 2021).
At this rate, Tylenol Brady may un-retire and win his eighth before the central bank hits target.
Another inconvenience is that people have memories. They just lived through torturous 8.1 per cent inflation, so they’re even more “attentive” to price increases nowadays, as Bank of Canada governor Tiff Macklem delicately puts it.
That means consumers are more likely to react to inflation threats quicker (i.e., buy more stuff sooner, and pay up now to avoid paying more later).
In turn, Macklem and co. must react more quickly, all else equal.
To be fair, both core inflation and inflation breadth (the share of CPI components inflating more than three per cent annualized) have been improving. That’s great.
But those are rear-view mirror indicators, useful mainly for telling you what already hit you.
And yes, U.S. trade negotiations could sour, oil could deflate in May, and Canada’s fragile economy could reshuffle today’s inflation and mortgage rate outlooks entirely.
But this is not the summer of 2008.
Back then, central bankers could ignore the massive oil spike. The financial crisis was a far bigger threat than commodity-driven inflation, so they kept cutting and prayed nobody noticed the gas pump.
While U.S. President Donald Trump’s trade threats could theoretically evolve into a serious crisis in their own right — especially if he exits the pact and Canada loses tariff exemptions — that’s a tail risk, not the most likely outcome.
Even a blowhard protectionist like Trump has a working sense of self-preservation. Beneath the tough-man act, he knows America earns more with Canada as an ally and customer than without.
So, expect a steady drumbeat of alarming headlines. My expectation is that the Big Bad Wolf in the White House runs the same playbook he did in 2018: make maximalist demands of Canada, use tariffs as leverage and threaten CUSMA (Canada–U.S.–Mexico Agreement) non-renewal.
What that means is that mortgage shoppers must lock onto the bogey in their sights, the most obvious and imminent threat: inflation.
How to play it
Upside inflation risk is clearly more acute than downside risk. That’s why government five-year bond rates have ripped 50-plus basis points higher in sixty days.
The five-year yield closed Wednesday at a 15-month high. That’s not the kind of move you see when markets are betting the Bank of Canada stays parked.
Instead, our job as prudent borrowers is to try to manage this upside rate risk. For folks who need a mortgage beyond 2031 and don’t have the luxury of deep liquidity, that means shifting more borrowing into longer fixed terms (three to five years).
And you don’t have to go all fixed. You can find lenders that’ll let you choose both — fixed and variable — in one mortgage.
Side note: Keep in mind that some lenders and brokers (not all) don’t like hybrid fixed/variable mortgages because they don’t have access to good rates on these products.
If you do lock in, leave yourself options by focusing on lenders with fair prepayment penalties (in case you need to get out early), flexible portability and reasonable early-refinance rules (i.e., lenders who will let you add more borrowing without building a prepayment penalty into your new rate).
In short, respect this uptrend in rates, tighten up on risk management and keep a few escape hatches handy.
Robert McLister is a mortgage strategist, interest rate analyst and editor of MortgageLogic.news. You can follow him on X at @RobMcLister.
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