- Markets largely shook off CPI with an eye on bigger concerns
- Traditional core was hot, trimmed mean and weighted median were not
- Why the BoC will ignore the readings
- BoC surveys show stable inflation expectations, but are too stale to matter
- Canadian CPI m/m % / y/y %, SA, December:
- Actual: -0.2 / 2.4
- Scotia: -0.4 / 2.2
- Consensus: -0.3 / 2.2
- Prior: 0.1 / 2.2
- Trimmed mean CPI m/m % SAAR: 1.1 (prior unrevised from 1.7%)
- Weighted median CPI m/m % SAAR: 0.5 (prior unrevised from 1.6%)
- Traditional core ex-food & energy % SAAR: 3.1 (prior revised to 1.6% from 0.8%)
Markets paid little heed to the latest batch of inflation readings. That’s perhaps because of four reasons. One is that the year-over-year rate picked up by more than expected. Second is that traditional core CPI sharply accelerated. Three is that the smoothed Q4 figures for headline and core gauges were a little firmer than the BoC expected way back in the now partly stale October MPR. Fourth is that inflation’s breadth increased again.
Against these points, however, is that the higher frequency measures for trimmed mean and weighted median ‘core’ measures of inflation continued to decelerate.
In other words, it’s a fine dog’s breakfast and the dog’s turning up its nose at the bowl and marching on by anyway. The dog’s holding out for something better. Something clearer. A bigger treat or shock. The BoC’s clear message is that it is on a prolonged hold.
A quick glance at charts 1 and 2 reveal one reason why they are doing so: we’ve seen soft patches in volatile data multiple times to date. Monetary policy cannot respond to every little quirk in sampled data even without getting into myriad other considerations that I shared in my week ahead focus on the BoC. It needs to give time for easing to date to work through the system amid forward-looking drivers of inflation, not least of which are potential lagging influences of higher costs.
DETAILS
The year over year headline rate of inflation climbed two-tenths to 2.4%. On base effects alone, it would have jumped to 2.6% if nothing else had changed. Part of the reason for this is because of year-ago changes in the GST/HST.
But the headline rate climbed by less than base effects alone, yet more than consensus estimated by landing at 2.4% y/y.
Seasonally unadjusted CPI was down –0.2% m/m but up 0.3% m/m SA.
Food prices were a benign influence (+0.1% m/m NSA, 0.25% m/m SA) but energy prices fell -4.2% m/m NSA (-1.1% m/m SA).
Core measures diverged. Traditional core CPI that removes food and energy climbed by 3.1% m/m SAAR whereas trimmed mean and weighted median were soft again at 1.1% and 0.5% respectively.
The smoothed Q4 averages were nevertheless not so much of a surprise to the BoC. Headline CPI was slightly firmer than the BoC’s now stale October MPR. Back then, the BoC forecast Q4 at 2.0% y/y for Q4 total CPI and instead it was 2.3%. They expected the average of the trimmed mean and weighted median CPI gauges to be 2.9% whereas they landed at 2.8%.
Given that the BoC has been telling markets it’s done with rate adjustments barring big developments, smoothed figures like these won’t change their mindset.
Chart 4 shows this was a firmer than usual month for traditional core CPI in unadjusted terms while chart 5 shows that the SA factor wasn’t terribly unusual.
Service price inflation accelerated (chart 6) while core goods inflation remained subdued (chart 7).
Breadth of inflationary pressures continues to trend higher (chart 8).
Charts 9–18 show break downs of other price subindices.
Charts 19–20 break down the CPI basket in y/y terms and weighted contributions to the y/y change in prices. Charts 21–22 do likewise for m/m changes.
Please also see the accompanying table for further details and micro charts.
I don’t pay much attention to the BoC’s surveys (here and here) but they showed little change in the consumer and business measures of inflation expectations. Businesses expect more firings, but the 100 firms they consult didn’t anticipate the hiring surge over the past four months. Further, they’re so stale, that a private survey firm would be out of business if they did likewise. Imagine an election survey—two months after the election.
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