As The Canadian Inflation Rate Starts To Decline, Will The Bank Of Canada Pause?
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It takes a lot of evidence to convince a central banker that an economy is slowing, even deflating. So, today’s release of the Canadian CPI for August will not likely change the Bank of Canada’s mind, but it should give it some pause regarding future rate hikes. Briefly, on a monthly basis, the Canadian CPI fell 0.3% in August, the largest monthly decline since the early months of the COVID-19 pandemic. Excluding the energy/food components of the index, the CPI rose just 0.2% for the month of August. (Food and energy prices are heavily affected by climate change and geopolitical events, i.e., the Russian -Ukrainian war. Neither can be influenced by domestic monetary policy)
Although one month does not make a year, the rate of the inflation rate is now running in line with the longer-term inflation target of 2%.
Figure 1 Canadian Inflation Rates Start to Drop
Source: Statistics Canada
Shelter costs are a very critical component of the CPI, and here the results indicate a marked slowdown. Owner accommodations expenses are lower in response to a cooling of the resale housing market; replacement costs reflected in the prices of new home construction have also been moderated. In contrast, the index for mortgage interest costs has risen in response to higher bond yields.
Turning to the financial markets, the slowdown in the Canadian inflation rate is being assessed by bond and currency traders. Today, the 5yr Canadian bond yield remains unchanged. The Canadian dollar continues to weaken as traders expect Canadian interest rates to peak below those in the US.
Viewed through the rear-view mirror, Canada’s inflation rate remains very elevated. However, the driver should be looking at the road ahead where the view is quite different. Inflation is decelerating in large measures in response to the coming recession which is now becoming more evident, especially in the US and other major industrial countries. It is not unreasonable to expect a further deceleration in the prices as previous rate hikes take their toll on consumption and business investment.
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Disclosure: None.
I agree with your sentiments, Norm. Does this instigaste the question as to whether the BoC is focusing less on the data and more on optics to tell a "story" in building credibility, which arguably may have eroded over the past few months?
Yes. The Bank is trying real hard to recapture their credibility which suffered by they slow response in 2021.
They will argue that the low unemployment rates indicate that aggregate demand is too strong and that is the reason for keeping the pedal to the metal. But food and energy are supply issues