Central bankers control huge economies that are a bit like supertankers.
Interesting fact about supertankers: They have tremendous momentum and can take three to ten miles and 15 minutes to stop.
The economies are similar. They are so large that our loyal monetary authorities are sometimes unable to get around economic icebergs quickly enough.
That could be happening as we speak.
The iceberg ahead is inflation, and the Bank of Canada and the Federal Reserve (Fed) seem to be hoping it melts before their economies plummet straight into the depths.
The reality of our situation
Here’s what the latest indicators say about annual inflation rates and recent one-month movements. US data is included because the Bank of Canada cannot pretend its southern neighbor does not exist when making policy:
Canadian inflation: 2.4 percent, plus 0.6
US inflation: 3.3 percent, a whopping increase of 0.9 in one month
Canadian gasoline: Increase of 21.2 percent (largest monthly increase on record)
Bank of Canada Inflation Estimate for April: three percent (partly due to base effects from the elimination of the carbon tax in April 2025)
Companies’ inflation expectations for one year: 3.8 percent, plus 0.8
Two-year corporate inflation expectations: 3.4 percent, plus 0.6
University of Michigan One-Year Inflation Expectations: 4.7 percent, up 0.9 (US data)
Cleveland Fed Nowcast Core PCE: 3.28 percent
Canadian average core inflation: 2.25 percent, minus 0.05
Canadian producer prices: 7.8 percent, plus 2.2 (in a month!)
US core PCE inflation: 3.2 percent, up 0.2 (a more than two-year high)
US producer prices: 4.0 percent, plus 0.6 (highest value in three years)
Five-year breakeven inflation rate in the US: 2.7 percent, plus 0.1 (the rough market expectation of average annual inflation over the next five years)
Average inflation in the US has been reduced: 2.4 percent, plus 0.1
Those are many advantages.
The last, trimmed average, happens to be the preferred inflation indicator of new Fed Chairman Kevin Warsh, soon to be the world’s most powerful banker. It’s worth remembering, as the Fed Chair’s preferred benchmark tends to become everyone else’s.
Like most core measures, the trimmed average will require more time to fully reflect rising energy costs. However, unless there is a major drop in crude oil prices this quarter, it will come.
And if traders see a much stronger rise in U.S. core metrics, batten down the hatches because U.S. Treasury yields could go vertical and Canadian rates would likely follow suit.
Meanwhile, the Bank of Canada has promised the government and citizens to bring inflation back down to two percent.
There’s just one annoying detail: The ostensibly preferred measure, average core inflation, hasn’t hit 2 percent since Tom Brady won his seventh Super Bowl (in 2021).
At this rate, Tylenol Brady could come out of retirement and claim his eighth win before the Fed reaches its goal.
Another disadvantage is that people have memories. They’ve just experienced a punishing 8.1 percent inflation rate and are therefore even more “alert” to price increases these days, as Bank of Canada Governor Tiff Macklem cautiously puts it.
This means that consumers are likely to respond more quickly to inflationary threats (i.e., buy more sooner and pay now to avoid having to pay more later).
Macklem and Co. again. must react more quickly, other things being equal.
To be fair, both core inflation and inflation breadth (the share of CPI components rising by more than three percent on an annual basis) have improved. That’s great.
But these are rearview mirror indicators, designed primarily to tell you what has already hit you.
And yes, U.S. trade negotiations could deteriorate, oil prices could fall in May, and Canada’s fragile economy could completely change today’s inflation and mortgage rate outlook.
But this isn’t the summer of 2008.
Back then, central bankers were able to ignore the massive rise in oil prices. The financial crisis posed a far greater threat than commodity-driven inflation, so they kept cutting and prayed no one noticed the pump.
While US President Donald Trump’s trade threats could theoretically develop into a serious crisis in their own right – particularly if he withdraws from the pact and Canada loses tariff exemptions – this is a tail risk and not the most likely outcome.
Even a pompous protectionist like Trump has a strong sense of self-preservation. Despite his tough stance, he knows America deserves more with Canada as an ally and customer than without it.
So expect a steady drumbeat of alarmist headlines. I expect the big bad wolf in the White House to follow the same pattern as in 2018: making maximalist demands on Canada, using tariffs as leverage and threatening to not renew the CUSMA (Canada-US-Mexico Agreement).
That means mortgage buyers must keep their sights on the bugbear, the most obvious and looming threat: inflation.
How to play it
The upside risk of inflation is clearly more acute than the downside risk. This is why interest rates on five-year Treasury bonds have risen by more than 50 basis points in 60 days.
The five-year yield closed at a 15-month high on Wednesday. That’s not the kind of move you see when markets are betting that the Bank of Canada will wait.
Instead, our job as prudent borrowers is to try to manage this upside interest rate risk. For people who need a mortgage beyond 2031 and don’t have the luxury of deep liquidity, that means they’ll need to shift more loans to longer, fixed terms (three to five years).
And you don’t have to fix everything. You can find lenders that allow you to choose between fixed and variable loans — in a 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 interest rates on these products.
If you do decide, give yourself options and focus on lenders with fair prepayment penalties (in case you need to get out early), flexible portability, and reasonable early refinance rules (i.e., lenders that allow you to borrow more without building a prepayment penalty into your new interest rate).
In short, respect this upward trend in interest rates, tighten risk management and have a few escape hatches in place.
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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