The Owl
The Weekly Wrap, February 23, 2024
Youthful inflows and the last inflation mile
By Mark Parsons, ATB Economics 23 February 2024 9 min read
In this week’s ATB Economics Weekly Wrap…
- That youthful glow - Alberta attracts young migrants
- Mission almost accomplished? Canadian inflation falls in January
- Electric current - Electricity prices temporarily push Alberta inflation higher
- Staying power - Consumers not throwing in the towel yet
- Positioned for growth - the Grande Prairie region
- Interesting Fact: The millennials are among us!
- Chart of the Week: The decline in extreme rates of global poverty
Young people come to Alberta in droves
Migrants tend to be younger, slowing (but not reversing) population aging effects.
Alberta added 56,245 people from the rest of Canada (a record) and 112,562 internationally (also a record) in 2022/23 (July 1 to June 30). That part we already knew.
What’s new is the age profile. Net migration to Alberta was highly concentrated in the 20-39 age cohort with young adults aged 25-29 in the top spot. While Alberta drew a younger crowd, the gains were broad-based. Indeed, Alberta gained people from other provinces and countries across all age groups (even 4 people 100 years of age or over!).
Alberta experienced strong growth from net migration between July 1 2022 and June 30, 2023
Is this what inflation victory looks like?
“One swallow does not make a summer, neither does one fine day...”
—Aristotle
Two years into the battle against inflation, it’s tempting to interpret any inflation declines with suspicion and a dose of caution. Coming off last week’s higher-than-expected U.S. inflation reading, we were prepared for some disappointment here in Canada.
Yet even for the skeptics, there was a lot to like about the January report. The headline rate came in at 2.9%—down from 3.4% and smashing the consensus call of 3.3%. And the details looked pretty good as well:
- Excluding mortgage interest costs (a function of Bank of Canada interest rate policy), inflation was 2%.
- It wasn’t just lower prices at the pumps. CPI inflation excluding gasoline fell from 3.5% to 3.2%.
- There were outright declines in items like clothing (-1.4%) and footwear (-4.1%).
- The key core inflation readings fell.
- Grocery prices rose at the slowest annual rate since August 2021 at 3.7% y/y. Yes, grocery prices are still very high (indeed 15% higher in the last two years alone), but a smaller increase is welcome.
The main outstanding concern is shelter. Rents rose 7.9% y/y, and the Bank of Canada has talked about shelter as a “material headwind against the return of inflation to the 2% target” due to structural factors: strong population growth and limited housing supply. That puts the Bank of Canada in a bit of a pickle, as cutting soon or signaling an imminent rate cut could fuel another increase in housing cost and adding to inflation. We saw that story unfold last spring with the ‘conditional’ pause. Yet keeping rates high doesn’t help on the supply side, either, as homes need to be built. And then there are the usual problems of elevated wage growth and inflation expectations.
It’s also only one month of data. As Aristotle warned, that doesn’t necessarily signal a turning point. At its March 6 rate meeting, the Bank will say that it wants to see if this disinflation pattern holds. Our thought is that the Bank will put a heavier weight on upside inflation risk, and remain cautious and slow. We’ve been between a June and July cut, and with this week’s CPI reading we’re back to June. What could make the Bank move earlier in April? Perhaps core inflation falling substantially in February along with a sharp slowdown in the labour market (and wages). But we wouldn’t count on it.
Excluding mortgage interest costs, the inflation rate in Canada in January was 2%
Electric current on Alberta inflation’s rate expected to weaken
In Alberta, the annual inflation rate did something it hasn’t done much of lately: rise above the national rate. In fact, it’s only happened 3 times in the last 24 months. Alberta’s inflation rate rose from 3.0% to 3.4% on electricity prices, which more than doubled from the same month last year. Core inflation (excluding energy and food) stayed below national inflation last month.
This is a lesson in base period effects. In January 2023 (the base period) two things happened: 1) The Alberta Government provided $75 rebates, which lowered electricity bills; and 2) introduced a rate cap of 13.5 cents kw/h on the regulated rate option, which functioned as a deferral (the difference between the approved rate and cap is paid back over 21 months). By January 2024, the rebates and rate cap were no longer in place. The end result is that electricity prices jumped year-over-year, despite the fact they were actually down relative to December and off their summer peaks by 30% (see the chart below).
Electricity prices have had a large impact on inflation in Alberta
What’s next? Regulated electricity rates fell slightly in February and are expected to fall further with new generation capacity coming online, making this a temporary effect. Even if the electricity CPI holds at January levels for the rest of the year, annual electricity price inflation would ease to 5.4% in 2024. In the more likely scenario that they fall further, electricity would likely subtract from this year’s inflation rate.
As in Canada, shelter remains the big driver of inflation in Alberta and this component will be more stubborn. Rental inflation was 10.8% y/y in Alberta in January, down slightly from December, but still highest since the early 1980s.
The fuel tax holiday contributed to lower inflation in Alberta, relative to the rest of Canada, over the last two years. While the fuel tax was partially reinstated in January for three months (subject to another review), gasoline prices fell only slightly less (-3.3% y/y) than the national average (-4.0% y/y). We should see more divergence in February, based on the latest prices from GasBuddy.
Consumers hanging in there, but spending expected to slow
We’ve been of the view for some time that the resilient consumer will slow their spending as inflation erodes purchasing power and higher interest rates bite with a lag. While we saw a marked slowdown in spending in the second half of 2023, the last two months were stronger-than-expected.
December sales were up a sturdy 0.9% (seasonally adjusted, so not a holiday shopping effect) building off a 0.5% gain in November. And it wasn’t just prices, as estimated volumes also rose in the last two months. The final tally for the year had Alberta retail sales growth of 4.4%—almost double the national average—amid stronger population and job gains.
This is impressive given the headwinds. But a longer term view points to a slowing trend. Sales ended the year only 2.4% higher than they were in December 2023, though this improves to 4.0% when you look at core sales (excluding autos and gasoline). As expected, with higher rates, the largest pullback has been in the big ticket category—furniture and electronics. Auto spending has held up amid pent up demand coming off supply chain issues and exceptionally low inventories. The steep drop in gasoline sales reflects lower prices.
Lower prices pulled down sales at gas stations in Alberta last year
Alberta sales are still below January 2023 levels, so unless there is material improvement early in the year (unlikely given rising loan/mortgage resets), y/y retail sales growth is set to cool significantly in the first quarter. Our more timely ATB Consumer Spending Tracker (based on the value of ATB consumer Mastercard transactions) points to a slight pullback in January—consistent with the retail sales advance reading for Canada.
The ATB Consumer Spending Tracker is based on the value of ATB consumer Mastercard transactions
Grande Prairie region positioned for growth
The Growing the North conference wrapped in Grande Prairie yesterday. I had the pleasure of providing the economic update on Day 1. This conference was packed with great information, covering everything from the major resource sectors, to healthcare in the North, to AI.
Grande Prairie, a city of about 68,000, has a diverse mix of resource industries, with strength in agriculture, forestry, and oil and gas. It also serves as an entertainment and retail hub for the Northwest serving a catchment population of 300,000.
On the energy side, it is at the center of two prolific energy plays—the Duvernay and Montney formations. Grande Prairie intersects the foothills front and northwest region, where natural gas production is forecast to grow from 6.9 billion cubic feet/day (bcf/d) in 2022 to 8.9 bcf/d in 2032, according to the latest Alberta Energy Regulator projections. Increased takeaway capacity through LNG Canada next year and later Woodfibre LNG should support natural gas prices (AECO). A number of low carbon petrochemical and fuel projects have been proposed in the M.D. of Greenview, taking advantage of the region’s abundant low-cost natural gas feedstock.
Here’s a fun demographic fact: Grande Prairie is the youngest centre in Alberta over 10,000 with a median age of only 34. Census Division 19, which includes Grande Prairie, has a 65+ share of 12.1% (versus 14.8% provincially), and this is expected to remain well below the national average (see chart). A younger population means a higher rate of natural increase (births minus deaths). Add in a higher-than-average rate of migration stemming from expected economic growth, and the region’s population is expected to grow by an average of 1.6% annually between 2022 and 2051 according to the latest Treasury Board and Finance projections‒third only to the Calgary region at 1.8% and the Edmonton region at 1.7%.
My next stop up North: High Level on March 12-14 for the REDI Made Business Showcase.
The proportion of seniors in the Grande Prairie region is lower than in Alberta as a whole
Interesting Fact: The millennial many - The latest population estimates from Statistics Canada show that—as of last summer—millennials (those born between 1981 and 1996) outnumbered baby boomers (those born between 1946 and 1965) for the first time in Canada. The main reason? Record numbers of temporary and permanent immigrants, who tend to be younger. But watch out millennials—Gen Z (1997 to 2012) could overtake you in numbers as early as 2038, according to Statistics Canada projections.
Chart of the Week: Economic news can seem pretty gloomy—high inflation, rising debt levels, and recession fears regularly steal the headlines. One fact sometimes overlooked is the progress made in reducing extreme poverty* worldwide. China stands out. The country’s emergence as the second largest economy in the world has been accompanied by an amazing improvement in its standard of living. According to Our World in Data, 97% of people in the Chinese countryside lived in extreme poverty in 1981 versus less than 1% today. However, high rates of extreme poverty still exist, particularly on the continent of Africa, with Mozambique, Malawi, Central Republic of Africa, and Niger with rates above 50%.
*Extreme poverty is defined as living below the International Poverty Line of $2.15 per day, and adjusts for inflation and cost of living differences across countries.
The rate of extreme poverty has fallen in China
Answer to the previous trivia question: About 117 Prince Edward Islands could fit inside Alberta.
Today’s trivia question: People born before 1928 (aged 95 years or older on July 1, 2023) are known as the ________ generation.
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