Canadian February CPI was at 2.8% compared to 3.1% expected in the second big downside miss.
Desjardins was out with a report this week highlighting how the Bank of Canada’s core inflation measures are skewed. It says the BOC’s reliance on CPI-median and CPI-trim measures, especially after disregarding CPI-common post-pandemic, is seen as flawed due to inherent biases that likely exaggerate true inflation rates. The report contends that adjusted core inflation is actually below 3%, contrary to the BOC’s estimation of 3.5% to 4%. They highlight the limitations of limited influence estimators like median and trimmed mean for real-time policy, as these may ignore vital economic signals.
Desjardins warns that overlooking these findings could result in the BOC maintaining overly restrictive monetary policies, harming households and businesses. It hints at a potential for a more dovish policy adjustment by the BOC, given recent lower-than-expected inflation figures.
Markets are not fully pricing in a rate cut until July, and are only braced for three 25 basis‑point reductions for the year as a whole. We believe the latest inflation reading, which came in significantly below forecast, has given the Bank of Canada cover to adopt a more dovish stance in April, even if policymakers don’t want to admit that their preferred measures of core inflation might have led them astray.
I can get behind that thinking and it should weigh on CAD.