- Canadian CPI: Down, but Up!
- Core inflation continues to be well above the 2% target at the margin
- PM Trudeau emphasized “dollar for dollar” retaliation
- CAD rallied and two-year yields shook off the initial reaction
- The BoC should take a breather and hold next week
- Canadian CPI, m/m // y/y, %, December:
- Actual: -0.4 / 1.8
- Scotia: -1.0 / 1.2
- Consensus: -0.4 / 1.9
- Prior: 0.0 / 1.9
- BoC’s preferred core inflation gauges, m/m % SAAR, December:
- Trimmed mean CPI: 3.5
- Weighted median CPI: 2.8
- Traditional core CPI: 3.2
It indeed went down, and up all at once! Weaker headline CPI isn’t the issue. What matters here is that Canadian core inflation remains hot and continues to put upward pressure on the BoC’s 2% inflation target. That’s true in terms of the Bank of Canada’s preferred core inflation readings (chart 1) and it’s also true for traditional core CPI that only excludes food and energy that climbed by the most since May (chart 2).
Part of the reason for this is that there is trend momentum in underlying price pressures. Another part of the reason is that retailers may have snagged some of the room vacated by the GST/HST cut for themselves either by offering less discounting than seasonally normal or by raising prices outright. Hello, incidence effects, retailers love you. Heat in underlying core gauges explains why headline inflation wasn’t as weak as estimated by focusing more on the direct effects of the GST/HST cut.
Markets Whipsawed by Inflation Double Take, Tariff Headlines
Canada’s two-year yield initially dropped when CPI was released as market participants first looked at headline CPI that fell by less than the fear factor. A combination of looking at the core inflation readings and when PM Trudeau’s comments hit resulted in the two-year GoC yield reversing the move. CAD held steady at first, but then appreciated from 1.4450 to 1.4380 for about a three-quarters of a cent gain to the USD through the inflation and tariff headlines.
PM Trudeau remarked that Canada is ready for “dollar for dollar” retaliation against US tariffs if imposed.
The BoC Should Pass
Market pricing for next week’s BoC decision, however, increased by 1–2 points to being over 80% priced in favour of a cut.
I don’t believe that the BoC should cut but they may well take the easy route in what’s priced. Jobs are ripping (recap here). Core inflation remains unacceptably warm. All of the BoC’s survey measures of inflation expectations are at or above the upper limit of the 1–3% inflation target range. Q4 GDP growth is tracking close to 2% q/q SAAR using monthly GDP accounts and possibly more on an expenditure accounts basis. Consumption is rebounding including in per capita terms. US tariffs loom and all signs point to strong Canadian retaliation that would add to underlying price pressures. The BoC is already at or very close to a neutral rate by contrast to the Federal Reserve. The Fed is waiting it out at 125bps above the BoC. CAD is a lepper in FX markets threatening to push into the 1.60s in a tariff and retaliation scenario.
Therefore, what’s the rush to cut after 175bps of cuts to date? I know one thing for sure: I wouldn’t cut at this point while leaving all options open going forward.
Details
Trimmed mean CPI was up by 3.5% m/m at a seasonally adjusted and annualized rate (SAAR). Weighted median CPI was up by 2.8% m/m SAAR.
The reported y/y trimmed mean and weighted median gauges pushed lower, but never go by those measures. They are calculated as slow changing m/m weighted compounded changes as opposed to being spot figures. They tell you more about what happened the prior eleven months toward which they are overwhelmingly weighted, than what happened at the margin.
Both of these readings are hot even after smoothing. On a three-month moving average basis, weighted median CPI is tracking at 3.4% m/m SAAR and trimmed mean CPI is tracking at 3.7%. The readings have been warm for an extended period of time.
And so the reason why headline CPI did not fall as much as expected is that retailers crowded in the space by offering less seasonal discounting than would otherwise be the case and/or by raising prices. Recall that the TM and WM measures exclude the direct effects of changes to indirect taxes like the GST/HST.
Charts 3–14 provide further illustrations of the price pressures.
Also see the accompanying appendix that breaks down the basket in greater detail along with additional measures and micro charts.
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