• BoC’s preferred ‘core’ gauges are on the 2% target at the margin
  • Services inflation vapourizes as core goods inflation remains subdued
  • Shelter CPI was an ongoing BoC concern and is waning
  • BoC to cut 50bps, but is at strong risk of reigniting inflationary pressures
 
  •  Canadian CPI, m/m %, September, NSA:
  • Actual: -0.4 / 1.6
  • Scotia: -0.1 / 2.0
  • Consensus: -0.3 / 1.8
  • Prior: -0.2 / 2.0
  • ‘Core’ gauges, m/m % SAAR:
  • Trimmed mean CPI: 2.3%
  • Weighted median CPI: 1.7%
  • Traditional core CPI: 2.4%

There has been a lot of baseless on– and off-speculation around the Bank of Canada’s next move but it needed data to justify a call. We now have that. The Bank of Canada is likely to cut 50bps next Wednesday on the heels of a report that shows that the Bank’s preferred core measures are on target. That was our instant reaction with our traders and clients seconds after seeing the core gauges. There is still the risk that the BoC—that has surprised markets many times in the past—could opt for –25bps, but the hurdle to doing so is set rather high now. I’ll also argue that while it’s our call, we disagree with upsizing.

Key is that the average of the trimmed mean and weighted median measures of core inflation slowed to an average of 2% m/m SAAR in September (chart 1). Weighted median CPI was the higher of the two at 2.3% m/m SAAR but trimmed mean CPI at 1.7% balances that out and the BoC tends to take an average. Traditional core (ex-food and energy) was up 2.4% m/m SAAR but this is on the heels of just 0.8% the prior month (chart 2).

Chart 1: BoC's Preferred Core Measures; Chart 2: Canadian Core Inflation

On a three-month moving average basis, traditional core CPI (ex-food and energy) is up by just 1.6% m/m SAAR, and both the weighted median and trimmed mean CPI gauges are up 2.1%.

So why 50bps?

  • Symmetry around the 2% inflation target amidst readings like these would be taken by the BoC as a need to focus more upon the risk of undershooting the 2% inflation target.
  • The output gap is estimated to be significantly negative which adds to this concern.
  • The BoC is likely to downgrade Q3 GDP growth from 2.8% in their prior forecast to around half that next week, thus advancing a narrative that their forecast rebound is being stymied at least for now.
  • Population growth is not yet slowing given the LFS reading that indicated another gain of over 100k in September which means—rightly or wrongly—the BoC can point to ongoing concerns about per capita numbers (partly still wrongly imo).
  • The BoC has surprised markets in the past, but it would need strong arguments to negatively surprise markets priced by 50. They would also need steely resolve to go against markets, most economists, and heavy pressure from the business community and politicians.
  • Macklem is unlikely to be that person who goes against such pressure given his naturally dovish instincts and so the BoC’s reaction function has to get a high weight in the forecast call.
  • With the policy rate presently at 4.25% and hence somewhere around 150bps above neutral, the BoC is significantly restrictive and still has room after cutting to 3.75% so say that they need to be careful going forward.
  • Services inflation has recently disappeared (chart 3) to go alongside weak core goods inflation (chart 4).
Chart 3: Canadian Service Inflation; Chart 4: Canadian Goods Inflation
  • Furthermore, the one main area where the BoC has been concerned about inflation risk in the short-term is shelter cost and that too waned sharply last month (chart 5). While the small roughly 3% weight in the basket on mortgage interest continues to wane, the BoC will place more emphasis upon charts 6 and 7 showing that perhaps rent and replacement cost of housing are more subdued on a trend basis.
Chart 5: Shelter Cost in Canada; Chart 6: Rents in Canada; Chart 7: Canada CPI: Homeowners' Replacement Cost

Opting to cut 50bps and the aggressive market easing around the expected path forward are likely to ignite growth faster over 2025–26 than otherwise, closing the output gap quicker than estimated along ongoing other sources of inflation risk from real wage gains alongside terrible productivity, severe housing shortages and ongoing immigration, likely fiscal pump-priming into an election year, and our work on the pent-up demand and pent-up savings that exist in the household sector. The BoC is at significant risk of unleashing inflationary forces.

Across other components, the transportation sector is driving disinflationary momentum (chart 8) as vehicle price changes are subdued (chart 9), airfare fell (chart 10) and gasoline prices fell (chart 11).

Chart 8: Canada CPI: Transportation; Chart 9: Canada CPI: Private Purchase of Passenger Vehicles; Chart 10: Canada CPI: Air Transportation; Chart 11: Canada CPI: Gasoline

Food prices were up but the low weight on the noisy trend did not have much impact on headline CPI (chart 12).

Chart 12: Canada CPI: Food Prices

Clothing prices fell (chart 13).

Chart 13: Canada CPI: Clothing & Footwear

The 0.1% m//m SA rise and the roughly 10% weight on the recreation/education/reading leisure categories drove little impact on overall inflation notwithstanding significant variation within the category (chart 14).

Chart 14: Breakdown of Monthly Changes within Recreation Education and Reading CPI Category

Please see more charts in the following pages that break out more of the components, as well as the detailed table at the back of this publication including measures of dispersion and micro-charts.

Chart 15: September Detailed Category 12-Month Change in Canadian CPI; Chart 16: September Detailed Category Contributions to 12-Month Change in Canadian CPI
Chart 17: September Detailed Category Monthly Change in Canadian CPI; Chart 18: September Detailed Category Contributions to Monthly Change in Canadian CPI
Chart 19: September Single-Month Components Included and Excluded from Bank of Canada Trim Core CPI Measure
Table: Canadian Inflation Component Breakdown
Table: Canadian Inflation Component Breakdown