- BoC’s preferred core inflation measures were hot again…
- ...and exclude the effects of the GST/HST change…
- ...that itself only drove about one-third of the headline month-over-month surge
- Ten months of still too hot core inflation merit a stop to monetary easing...
- ...as the BoC faces further near-term pressures on inflation
- Canada CPI m/m %, February, NSA:
- Actual: 1.1 / 2.7
- Scotia: 1.1 / 2.6
- Consensus: 0.6 / 2.2
- Prior: 0.1 / 1.9
- Core inflation, February, m/m % SAAR:
- Trimmed mean CPI: 4.0
- Weighted median CPI: 3.4
Canadian inflation spiked higher and further reduces prospects for additional rate cuts by the Bank of Canada. The readings matched Scotiabank Economics’ expectations. The end of the GST/HST cut was only a modest part of the explanation. The bigger issue is that the BoC’s preferred core readings—that exclude taxes—were hot again.
USDCAD shook it off but that was because the impact of Canadian data coincided with stronger than expected US data for housing starts, industrial output and import prices. Canada’s two-year yield climbed only 1–2bps and may not have understood the drivers. Under a third of a 25bps rate cut is priced for the April meeting and is probably too much.
The BoC is Making Inflation Hot Again
The BoC’s preferred core measures of inflation are shown in charts 1 and 2. This latest reading is no flash in the pan. They show the readings in month-over-month terms at a seasonally adjusted and annualized rate in order to capture inflation pressures using the most timely measures. They are simply too hot and have been too hot in a long stretch back to last May. The longstanding trend points to readings that are clearly saying that the BoC’s work is not done. They question why the BoC—an inflation-targeting central bank—has been in such a rush to cut to 2.75% for 275bps of easing to date.
Core inflation has yet to show a convincing pattern of lagging disinflation to the emergence of a small amount of slack in the economy and that should merit the BoC ending cuts for some time especially amid the looming effects of tariffs on inflation and rising inflation expectations. More near-term pressure lies ahead as written in my weekly (here).
Limited Impact of the GST/HST Cut
The spread between headline CPI and CPI excluding the effects of indirect taxes like the GST/HST was 0.37% m/m in February (charts 3–4). This means that of the 1.1% m/m rise in CPI, seven-tenths was due to other factors. If markets only reacted mildly because they thought the inflation surge was due to the GST/HST then that’s incorrect. The tax effect on February CPI mirrored the way down starting in December when the tax was first cut. There is probably another +0.3–0.4 impact of the end of the GST/HST cut coming in March CPI due on April 15th.
Widespread Pressures
Charts 5 and 6 show the acceleration in goods and services prices. Unlike the trimmed mean and weighted median measures, these aggregates cannot exclude the effects of changes in indirect taxes like the GST/HST and so interpret with care as a modest amount of their acceleration was due to the tax cut. Statcan estimates that the GST/HST applies to about 10% of the overall CPI basket.
Traditional core CPI ex-f&e also soared, but unlike the trimmed mean and weighted median measures this one does not exclude the effect of changes in indirect taxes (chart 7).
The Worst Possible Combination of Effects
Charts 8–9 show that this February had among the highest seasonal adjustment factors on record compared to like months of February and that this combined with among the highest seasonally unadjusted gains on record when comparing like months of February over time.
Details
Charts 10–18 break down the basket into more individual components. Interpret them with care as the measures in these charts include the effects of changes in indirect taxes, though obviously more so in some cases, like food, than in others, like shelter while recalling the limited application of the GST/HST cut. Key is that shelter was not the driver this month as shelter price inflation ebbed. This has been an overstated excuse for persistent inflation.
Charts 19–20 break down the CPI basket in detail using m/m measures and weighted contributions to the overall m/m CPI rate of inflation. Charts 21–22 do likewise in y/y terms. Also see the accompanying table that provides further detail, micro charts, and measures of dispersion.
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