- Canadian core inflation was weak in November…
- …but the smoothed trend remains warm
- Markets had a very slightly dovish reaction…
- …but the BoC will shake it off for several good reasons
- Canadian CPI m/m % / y/y %, SA, November:
- Actual: 0.1 / 2.2
- Scotia: 0.1 / 2.3
- Consensus: 0.1 / 2.3
- Prior: 0.2 / 2.2
- Trimmed mean CPI m/m % SAAR: 1.7 (prior unrevised from 2.8%)
- Weighted median CPI m/m % SAAR: 1.6 (prior revised up to 2.2% from 1.6%)
- Traditional core ex-food & energy : 0.8 (prior revised to 2.3% from 3.1%)
Canadian core inflation gauges came in softly even as headline CPI roughly matched expectations (charts 1, 2). The trend in core gauges nevertheless remains above 2% in m/m annualized terms, signalling persistent underlying inflationary pressures that will keep the BoC sidelined. Markets reacted by driving a mild rally in Canada 2s that saw the yield drop by about 3bps post-release while USDCAD rose very marginally.
Why it Doesn’t Matter
There are several reasons not to pay much—if any—heed to the figures.
For one, the BoC focuses on trends. So do we. So should you. With the effects of revisions, the 3-month moving averages for traditional core CPI (2.1%), weighted median CPI (2.2% m/m SAAR), and trimmed mean CPI (2.4%) are all on- or slightly above the 2% medium-term headline CPI target. This is basically just one single month of soft core gauges.
For another, there is always notable revision risk primarily as Statcan adjusts SA factors. For instance, this time Statcan revised down traditional core CPI by 0.8 ppts m/m SAAR in October and revised up weighted median CPI by 0.6% m/m SAAR. They are volatile gauges.
Also, there isn’t much to be made of the reading because this is one of two inflation reports before the next Bank of Canada policy decision on January 28th.
Further, monetary policy carries long and variable lags of, say, 12–24 months such that many of the prior rate cuts have not worked through the system yet. You don’t keep easing without giving the lags a chance to work their magic.
There were also large positive GDP revisions that cut down slack estimates and the job market has been ripping with 187k jobs created in the past three months. Fiscal policy across the federal and provincial governments is also at a nascent stage of working through.
The outcome of trade negotiations are anyone’s best guess. I’m maintaining cautious optimism we wind up at a decent spot pre-midterms but along a bumpy path.
Details
This was one of the softest m/m NSA headline CPI prints on record when comparing like months of November (since it’s not seasonally adjusted). Chart 3.
What offset this point is that the seasonal adjustment factor was one of the strongest ever (chart 4).
All of the main core measures were soft. Traditional core CPI ex-food and energy ebbed to 0.8% m/m SAAR from 2.3% the prior month. Trimmed mean CPI was at 1.7% and weighted median equalled 1.6%.
Core goods inflation (ex-food and energy) was fairly contained even though it picked up to the warmest reading in six months (chart 5).
The big story here, however, is that services inflation ebb and continues to be highly volatile (chart 6).
The breadth of price pressures was little changed and still relatively high by historical standards in terms of the share of the basket that is up by 3% y/y or more (chart 7).
Charts 8–17 show breakdowns of the basket by component.
Charts 18–19 show the unweighted changes and weighted contributions by component both in y/y terms.
Charts 20–21 do likewise for m/m readings.
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