- The BoC’s preferred core inflation gauges surprised higher again
- The drop in short-term market yields misread the readings
- No, mortgage interest and concerts did not drive the core gauges
- Why the numbers just don’t matter
Canadian inflation sent another warning shot across the Bank of Canada’s bow. Markets ignored it and reacted inappropriately by driving slightly lower short-term yields in Canada after the release. They did so either because they saw the numbers differently than how I’ll look at them in this note, or because today’s update really doesn’t matter much in the grand scheme of things. Why? There will be another CPI report in January before the BoC’s January 29th decision on the same day as the FOMC’s decision and nine days after US inauguration when we’ll find out if tariff wars really have begun. Those are the issues that really matter and in the context of high political uncertainty. CPI? Meh.
Key is that the BoC’s two preferred core inflation readings were hot again. And no, neither mortgage interest’s inclusion in one of those measures or Taylor Swift are to blame.
Trimmed mean CPI was up 3.5% m/m at a seasonally adjusted and annualized rate (SAAR). Weighted median CPI was up by 4% m/m SAAR. Together, the average was up by 3¾% m/m SAAR.
That’s still too hot. The three-month moving averages of these measures now stands at 3.5% m/m SAAR for both. They are accelerating, not just as one-offs, but as a trend over recent months (chart 1). What used to be the BoC’s preferred core gauge—excluding only food and energy—was much soft (chart 2) and so were the CPIX and CPI-ex-8 measures.
Using the BoC’s preferred measures shows that core inflationary pressures remain well above the BoC’s 2% target at the margin and this is important. It’s why you should ignore the headline y/y CPI reading of 1.9% y/y that was lighter than consensus but stronger than I had estimated. Developments in core inflation ultimately guide headline inflation in terms of what monetary policy stands the best chance at controlling by way of price pressures and those price pressures have to be evaluated in higher frequency m/m terms at the margin.
Services drove the overall tone as goods CPI ex-food and energy was soft (charts 3, 4).
There were a couple of data quirks, but neither mattered beyond being entertaining. Don’t be a hater toward her role here, as Taylor Swift’s concerts were probably behind the 11% m/m jump in traveller accommodation in Ontario, but overall travel services were excluded from the trimmed mean gauge in the upper 20% of the distribution. Plus, reduce that 11% rise by Ontario’s weight.
Second, mortgage interest slightly messed things up but not enough to materially matter. Mortgage interest was included in the trimmed mean CPI for the first time not only in the pandemic-era but even before (chart 5). That just says it’s no longer rising fast enough to be eliminated. It was not weeded out in the 20% upper tail of the weighted distribution of prices in the overall CPI basket this time. At a 5.4% basket weight applied to a 0.6% m/m SA rise, mortgage interest’s 7.1% m/m SAAR rise contributed a weighted 0.6 percentage points to the 3.5% m/m SAAR rise in overall trimmed mean CPI. Ergo, TM would have been 2.9% without mortgage interest which is still too warm.
And since mortgage interest was not the 50th percentile weighted price in the overall basket, it was not the weighted median inflation reading.
All of which is to say that excluding mortgage interest, the average of the TM and WM inflation readings was about 3½% m/m SAAR and neither of these readings were affected by concerts.
Shelter costs were up again and primarily because of higher rent as homeowners’ replacement cost—driven by builder prices—was weak last month (charts 6–8).
Transportation was warmer than I thought it was going to be and because of another rise in vehicle prices while airfare posted a small gain (charts 9–13).
Clothing prices were softer after the prior month’s surge (chart 14) and seasonally unadjusted CPI was flat while seasonally unadjusted core CPI was down by –0.1% m/m NSA. Other than those drivers, however, the rest of the report was significantly warmer than I had expected.
Please also see charts 15–16 that break down the y/y components in unweighted % terms and weighted contributions to CPI, plus charts 17–18 that do likewise for the month-over-month components.
Lastly, please see the accompanying detailed table including other micro charts and measures.
Now back to things that really matter.
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