The Bank of Canada is Not on Track For Cutting Any Time Soon

• Canadian core inflation accelerated again...

• ...with upward revisions

• As hot as inflation is, wages are even hotter...

• ...meaning that an awful lot has to go right to get BoC cuts by 2024H2

• Markets further reduced pricing for a nearer-term BoC cut

• Central banks will continue to favour data dependence over forecasts

• Canadian CPI m/m SA % / y/y %, December:
• Actual: -0.3 / 3.4
• Scotia: -0.3 / 3.4
• Consensus: 0.3 / 3.4
• Prior: 0.1 / 3.1
• Trimmed mean CPI: 4.8% m/m SAAR / 3.7% y/y from 3.5%
• Weighted median CPI: 4.7% m/m SAAR / 3.6% y/y from 3.6% (revised up from 3.4)

The latest inflation evidence continues to push back against market pricing and some forecasters’ views that the Bank of Canada will be cutting by the March and April meetings. March has been mostly wiped out and April’s cut pricing was further reduced.

Not going to happen folks. I’ve argued for a long time that one should be paying those contracts; doing so would have paid off handsomely by now. In fact, I think an awful lot has to go right from here in order to get the BoC to be cutting by the consensus call for around mid-year or even this year and to this point I just don’t see the required evidence.

Key is that the BoC’s preferred gauges of underlying inflation accelerated again as shown in chart 1. Trimmed mean CPI—that lops off the top and bottom 20% of the CPI basket—landed at 4.8% m/m at a seasonally adjusted and annualized rate. Weighted median CPI—that takes the 50^th percentile price—was up by 4.7% m/m SAAR. Both readings are far above the BoC’s 2% inflation target and signal no progress toward achieving it any time soon. These are central tendency inflation measures totally unaffected by outlier price changes like mortgage interest.

The year-over-year rates also picked up to 3.7% y/y from 3.5% for trimmed mean and to 3.6% y/y for weighted median CPI with the prior month revised up to 3.6% from 3.4%.

There were also material upward revisions to prior months. For example, weighted median CPI in m/m SAAR terms was revised up by 1.2% in September and by 0.6% in November. Trimmed mean was revised up by 0.6% in each of September and October. These revisions provide hotter than previously understood tracking of inflationary pressures prior to December.

As hot as Canadian underlying inflation appears to be, wage growth remains hotter yet. Chart 2 shows that wage growth has been outpacing inflation for an extended period of time. Add in tumbling productivity. The combination of all of that makes it extraordinarily difficult to imagine the BoC cutting any time soon.

Core goods inflation drove much of the upward pressure in December as CPI ex-food and energy was up by 6.7% m/m SAAR (chart 3). 

Services inflation ebbed last month but remains very volatile and rather warm on a trend basis (chart 4).

In all, we’re still in an environment in which the executive ranks at central banks are very likely to retain a high degree of mistrust toward what models are forecasting for inflation after their many failures. Instead, they will remain highly data dependent and have comfort to ease only when they have a sustained period of much softer readings that are expected to persist. One cannot have that comfort in Canada to date as inflation risk continues to push higher.

Other Details

Headline CPI fell –0.3% m/m on a seasonally unadjusted basis as expected and that translates into a seasonally adjusted rise of +0.3% m/m. December is normally a down month for seasonal price pressures against which seasonal adjustment factors compensate.

On an SA basis, food was up 0.4% m/m, shelter 0.4, household operations/ furnishing and equipment fell -0.2%, clothing and footwear was up 0.5, health and personal care ticked higher by 0.1, rec/education/reading fell by -1.3, and the so-called 'sins' were up by 0.1%.

Shelter costs were sharply higher again (chart 5) mainly due to rent (chart 6) as the way Canada captures house prices in CPI was soft again (chart 7). Watch how this evolves in future as the massive surge in excessive immigration transitions from the rental stock into the owned accommodation housing stock as explained and including a chart in my morning note.

Transportation costs also jumped higher (chart 8) due to a combination of airfare (chart 9), auto prices (chart 10) and gasoline prices (chart 11).

Food price inflation accelerated again (chart 12).

Travel tours and accommodations dragged down the recreation/education/reading category (chart 13).

Chart 14 provides a breakdown of the whole CPI basket in year-over-year terms. Chart 15 does the same thing in terms of each component’s weighted contributions. 

Charts 16 and 17 do the same things for month-over-month inflation.

Please also see the accompanying table that provides a more detailed breakdown of the basket and its components including micro charts and z-score measures of deviations from trends.

With thanks as always to Jay Parmar for his research assistance.