Conventional wisdom has it that the Bank of Canada is not done raising interest rates. Statistics Canada reported last week that year-over-year increases in the consumer price index accelerated to 3.3 per cent in July from 2.8 per cent in June, despite a staggering numbers of rate hikes since early 2022.

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Peter Hall: Why the Bank of Canada should ignore the July inflation spike Back to video

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Markets had expected an uptick in inflation, but not by that much. Pundits chorused that on balance the inflation report was bad news for the central bank, and that it increased the odds of more hikes to come. Were they right?

Dive into the details, and at first blush it doesn’t look great. But what wasn’t discussed in the news flashes was that certain key groups in Statistics Canada’s price basket were either deflating or in disinflation territory last month. The cost of household operations, furnishing and equipment — a category that accounts for almost 15 per cent of the basket — has fallen by an average of 0.5 per cent per month for the past three months. That’s an annualized drop of 5.9 per cent. Ouch.

It’s not alone. The clothing and footwear category has tumbled by 2.8 per cent in the past two months. Meanwhile, health-care costs have flatlined. About a quarter of the basket has already taken a hard hit from higher borrowing costs.

What also seemed to bypass the collective banter is the impact on inflation of interest rates themselves. The data show that mortgage interest costs — a line-item in the consumer price index — are up a whopping 30.6 per cent compared with July 2022. Nothing else in the index is even close.

The eye-popping number isn’t a result of some dated anomaly in the data. Monthly growth is still at a breakneck pace, on an annualized double-digit streak that is into its fourteenth month. At present, the annualized monthly increase is averaging 24 per cent. Momentum is so strong that if monthly rates immediately slowed to two per cent (highly unlikely, given the timing of interest rate increases), the headline year-to-year number for mortgage interest would still be up by double digits until next February, and wouldn’t be in the Bank of Canada’s sweet spot until July 2024.

Let’s remember, this is inflation that is caused by central bank actions — one of those strange situations where the antidote is the venom itself. But if so, shouldn’t the measure of success be the price path of everything but mortgage interest costs? Seems reasonable.

Dissenters would counter that mortgage interest costs are too small to matter. True, the 2022 CPI basket weight for mortgage interest was just 3.46 per cent. But multiply that by 30.6 per cent growth, and you add a full percentage point to headline inflation growth. Last week’s report points this out: net of mortgage interest costs, the consumer price index actually rose by just 2.4 per cent — within a hair of the Bank of Canada’s target. By this measure, we could conclude that the inflation battle is almost won.

Sadly, few people see this number; and if they do, they likely find it a bit confusing. What makes sense to them is the headline. And headline growth jumping to 3.3 per cent in July is enough to keep their price expectations of where inflation is headed well above the Bank of Canada’s target of two per cent. The bank’s stated task is not just to get prices back in line, but also to tame those expectations. Many thus reluctantly conclude that our monetary authority’s work is not done, and that they may need to keep raising rates.

But there’s a significant risk of overdoing it. Let’s do the math. Given that increases in interest costs won’t be abating any time soon, if the Bank of Canada wants to get headline inflation to two per cent, it would have to drive all other consumer costs down to growth of just 0.9 per cent. This path of action virtually guarantees that more broad categories would be in the disinflationary or deflationary zones. The risk to the economy is that, once the growth in interest costs eventually slows, overall price growth would then be well below target — possibly a bigger challenge to deal with than wresting current inflation to reasonable levels.

There’s another possible path. If the consumer price index net of mortgage interest costs was the target measure, the central bank would be satisfied with getting it to two per cent growth. If this were achieved, layering in interest costs would lift headline CPI to roughly three per cent. It might take some clever messaging to manage expectations and price-setting, but it might be worth it. The first path risks a considerable loss of economic activity and employment.

Without question, this is a delicate dance. But it’s preliminary at best to conclude that the latest inflation data force the Bank of Canada into further tightening. Rate hikes to date will still be biting hard on the economy well into next year. Spurious and fleeting price changes will doubtless complicate the exercise, but the potion seems to be working. Too much can be lethal.