Canadian inflation cools, worryingly so in the details

Canadian inflation continues to soften, and soften faster than expected, reinforcing calls for the BoC to up the pace of easing to 50bp increments.

Headline price growth is now tracking at 2.0% YoY, in line with the BoC’s price growth target, a full 0.5% lower than in July. In fact, aggregate prices fell outright last month, dropping -0.2%, having been expected to grow 0.1% MoM. Underlying inflation measures also continue to ease, highlighting fading upside risks. While we stick with our call for the BoC to ease in 25bp increments, matching the pace we expect from the Fed, the case for faster BoC rate cuts is clearly growing, posing upside risks for CAD.

If any more evidence was needed that the BoC has successfully contained inflation pressures, the finer details of today’s CPI report have it in spades.

Looking at the BoC’s preferred measures for underlying price growth, core median CPI growth fell from 2.4% YoY to 2.3%, while core trim CPI fell from 2.7% to just 2.4%. Indeed, our own preferred measures of underlying inflation pressure are more troubling. Core PCI ex-shelter is now just 0.35% YoY. CPI excluding mortgage and rent costs, meanwhile, fell from 0.85% YoY in July to just 0.30% in August. Perhaps most alarmingly to us, inflation momentum on both measures turned negative last month, having previously been tracking above 3% across both measures on a 3mma annualised basis.

If anything, this suggests the BoC has done more than just cool inflation – they might have killed it, a development that should be cause for growing concern amongst the Governing Council.

Indeed, almost all Canadian price growth is now attributable to shelter components. And these should not worry policymakers. Slower population growth due to lower immigration, rate cuts, and the lagged effects of policy tightening all point to further disinflation for shelter costs in the pipeline. Instead, with headline inflation back to target and growing signs of a slowdown below the surface, there is an increasingly strong case for the BoC to accelerate the pace of rate cuts. Admittedly, for now, we continue to look for consecutive 25bps cuts from the Governing Council. As we see it the optics of accelerating the pace of easing remain unfavourable, provided the Fed fails to ease by 50bps tomorrow, meeting our expectations or a 25bp cut. That said, a dovish Fed surprise or a further slowdown across other data readings could well see a 50bp BoC rate cut become the base case ahead of October’s rate decision, entailing downside risks for the loonie over the coming months.

The BoC’s preferred inflation measures continue to cool back to target. Our own favoured indicators suggest this may understate the degree to which underlying price growth has softened

Author: 

Nick Rees, Senior FX Market Analyst

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