Canada CPI the lowest since March 2021
Today’s Canadian CPI report highlights how far the Bank of Canada has fallen behind the curve.
Virtually the lone sources of inflation are mortgage interest and shelter, which is due to laggy rent calculations. Overall inflation is at 2.0%, hitting the target for the first time since 2021 but a deeper dive shows a weaker picture.
Excluding mortgage interest — something the Bank of Canada directly controls — inflation is 1.2% y/y. Excluding shelter, prices only rose 0.5% in the year.
Rents rose 1.0% in the month and 9% in the year but those numbers likely reflect lags in how the data is calculated. Market-based rents are falling in Canada’s biggest cities and slackening elsewhere.
CIBC also highlights some worrisome trends, especially in back-to-school shopping.
“Clothing & footwear prices also fell on the month,
which Statistics Canada noted was atypical for August, which generally sees price increases due to back-to-school
shopping. Indeed, it was the first August decline in that component since 1971, and could be an indication that weak
demand had left retailers with a stock overhang towards the end of the summer.”
They also noted soft vehicle prices as well as downward pressure on travel tour, air
transportation and traveler accommodation prices.
This certainly doesn’t look like a central bank that needs to have borrowing rates at 4.25%.
CIBC writes:
“With gasoline prices falling further into September, headline inflation should ease again in the
next release and CPI excluding MIC could well fall below 1%. The bottom line then is that inflation remains unthreatening
and the Bank of Canada should now focus on trying to stimulate the economy and halting the upward climb in the
unemployment rate. We continue to forecast a further 200bp of interest rate cuts between now and the middle of next
year.”
The big question for the BOC is whether to start cutting by 50 bps. Governor Tiff Macklem has highlighted growth data as something that will tilt his decision but the inflation numbers show he’s already behind the curve.