- Core inflation trend remains too warm for continued easing
- So does the job market
- Economic growth is tracking near potential
Canadian inflation remains too warm for the Bank of Canada to continue easing. The key is the appropriate measure to use. It’s not headline CPI.
Chalk up another warm one for the Bank of Canada’s preferred measures of underlying inflation. Trimmed mean CPI was up by 2.9% m/m at a seasonally adjusted and annualized rate (SAAR). Weighted median was up by 2.8%. They have been on a six-month warming trend after a brief period of respite in July. Chart 1 shows the trend. The actual data is shown in chart 2. The three-month moving average for weighted median sits at 3% m/m SAAR and for trimmed mean CPI it is 3.1%.
Markets reacted by driving the odds of a BoC cut on March 12th to below 30%.
There is too much underlying inflationary pressure in Canada to warrant an inflation-targeting central bank easing monetary policy further. The state of the job market also does not merit further easing (recall here).
GDP is hardly screaming out for further easing as growth is near BoC forecasts and close to estimates of potential GDP. I’m tracking Q4 GDP growth of around 1.6–1.7% q/q SAAR which is close to the BoC’s estimate in the January MPR. Statcan’s ‘flash’ estimate for December GDP of 0.2% m/m SA matches mine with little data left to consider. The 0.9% m/m SA surge in hours worked in January after a 0.7% gain in December leans toward further growth in January given that GDP is an identity defined as hours worked times productivity.
With the understanding that they do not remove the effects of the GST/HST cut (chart 3), charts 4–14 provide break downs of the components. Several categories like services, restaurants and alcohol would have been heavily influenced by the temporary tax cut that began in mid-December and expired this past Saturday.
Charts 15–16 break down the whole basket in m/m % terms and in terms of weighted contributions to the m/m % CPI change. Charts 17–18 do likewise for year-over-year rates. Also see the accompanying table for further details.
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