- Focusing on year-over-year headline CPI on target at 2% is misleading...
- ...because the BoC’s preferred core inflation gauges accelerated at the margin…
- ...as trimmed mean and weighted median are trending well above 2% headline target
- Shelter cost inflation accelerated, with probably more to come
- Sticky underlying inflationary pressures council against upsizing rate cuts
- CDN CPI m/m % NSA // y/y %, August:
- Actual: -0.2 / 2.0
- Scotia: 0.0 / 2.1
- Consensus: 0.0 / 2.1
- Prior: 0.4 / 2.5
Upsizing on the back of this data would be a policy misstep in my view. That’s because Canadian core inflation picked up again in August over July by contrast to headlines that shouted with glee that the year-over-year headline CPI inflation rate has fallen back to 2%.
The BoC targets headline inflation of 2% over the medium-term but uses its core gauges in higher frequency fashion to operationalize the likely, durable achievement of this mandate. It’s unclear that underlying inflation has cooled fast enough to durably hit 2% headline inflation. Pre-judging this by accelerating easing is among the risks that could reignite inflationary pressure especially with ongoing evidence that a key part of the basket remains hot (shelter) and could become hotter yet.
Key here is to look at the BoC’s preferred core inflation gauges in month-over-month terms at a seasonally adjusted and annualized rate. On that basis, weighted median CPI was up 2.9% and trimmed mean CPI was up 2.3% for an average of 2.6%. That’s not ripping hot like the past, but it suggests that underlying inflationary pressures remain.
In fact, August’s reading treats that softer July one-handled m/m SAAR core inflation patch as transitory since we’ve returned to the kind of readings that were being registered in the three months from April through June (chart 1). April’s average was 2% m/m SAAR, then 3.8% in May, then 2.9% in June, then 1.7% in July and now 2.6% in August. These measures have been trending higher along a volatile pattern from the lows at the start of the year.
Those readings are warmer than what used to be used by the BoC. Traditional core CPI excluding food and energy is shown in chart 2. Those readings have been quite soft over the past 2–3 months.
Chart 3 shows there was a mild pick-up in still soft core goods prices.
Chart 4 shows there was a deceleration in total services prices and chart 5 shows that this was also true in CPI services ex-shelter that are highly volatile from month to month but weighed on the category despite the next points.
Where I was surprised was by the fact that shelter cost inflation accelerated again (chart 6). That remains a key concern at the BoC and perhaps even more so in the wake of the federal government’s added mortgage stimulus that was announced yesterday.
Against my expectation that rent inflation should have ebbed last month, it went the other way and accelerated (chart 7). This goes against evidence that student rents fell sharply into the new school year as Ottawa curtailed the number of international students. Maybe cooler rent will show up next month. Or maybe there was offsetting heat in other parts of the rental market. Or maybe it boils down to Statcan’s quality adjustments in tracking key benchmarks.
Housing’s replacement cost also accelerated by the most since early 2022 (chart 8). CPI includes house prices using the house-only component of Statcan’s new house price index as input into measuring the replacement cost of housing. Builders hiked their prices last month.
Mortgage interest is coming off the boil (chart 9). It is still not being included in the m/m SAAR trimmed mean CPI basket nor is it the weighted median 50th percentile price point. Mortgage interest has not been included in these gauges at any point in the pandemic and in the lead-up to the pandemic.
Other categories are shown in the remainder of the charts that are included. Some stand-out observations include soft transportation prices across vehicles and airfare, a rebound in travel tour prices that popped the recreation and education category higher, and softness in clothing and footwear prices.
Please also see the accompanying detailed table showing more price categories and measures including micro charts.
In conclusion, the BoC’s dovish reaction function may well upsize, but a) core inflationary pressures at the margin don’t support doing so, and b) it would be a dicey bet that growth doesn’t accelerate faster than potential GDP growth and resurrecting inflation risk.
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