Canadian inflation is expected to tick higher when it is reported later today. But the core rate is expected to keep to the downward trend. It might not be enough to raise worries that the BOC will give up on rate cuts at some point this year. But, rising inflation does make it harder to argue for cutting in the near term. This could help firm up the Loonie.
The consensus among economists is that inflation in December will show an annual increase of 3.3%, up from 3.1% in November, that would be the first time that prices turned to the upside since the summer. That’s key, because the BOC initially started to pause rate hikes, but was forced to resume more tightening as inflation threatened to get out of hand.
The Trend Matters More Than the Data
Those still hoping for a rate cut from the BOC at some point this year can point to the projections for the core rate. Trimmed mean – the BOC’s preferred measure – is expected to tick down to 3.4% from 3.5% in November. That would continue the downward trend, and the argument could be made that holiday shopping added some extra volatility into prices.
What could generate more volatility for the markets, though, is if the data doesn’t match expectations. Given the market’s bias towards rate cuts from central banks, including the BOC, a higher inflation rate would likely come as a bigger surprise. A miss of expectations would fit within the narrative, and might justify further weakness in the Canadian dollar.
It’s Easy for the Numbers to Not Add Up
A faster than expected increase in prices combined with a beat of just one decimal point on the core could end up worrying markets. Since the consensus is for such a small reduction in the core inflation rate, it doesn’t take much of a beat to end the downward trend. A beat by one decimal would mean core inflation is unchanged; and just two decimals higher than expectations would show a reverse of the months-long downward trend in inflation.
There is already a basis for an increase priced into the headline inflation number as well. Back in November of 2022, there was an extraordinary drop in gasoline prices. That figure will roll off the 12-month gauge of prices. On top of that, the rising prices of crude due to Middle East tensions would have started to filter through to the Canadian consumer.
What Could the BOC Be Thinking?
The Bank of Canada will be conducting its own Business Outlook Survey, with the results being announced later today as well. The expectations number would point to whether businesses see prices slowing in the future, an important indicator for whether inflation is coming down.
Another factor is that about a third of the recent rises in core inflation have been due to increased cost of mortgages. That’s a direct result of the policies of the BOC, and therefore could be discounted by the regulatory agency in terms of deciding if inflation is too hot. Excluding that, then core inflation has been within the 1-3% target range. That could keep the BOC on track to cut later this year, even if inflation rises faster than expected.
