Inflation metrics give BoC room to talk cuts

Economists widely expect central bank to start cutting rates in June

Inflation metrics give BoC room to talk cuts

Key measures for underlying price pressures that the Bank of Canada is watching show broad disinflation progress, setting the stage for a pivot to easier policy. 

Despite a large increase in gas prices last month, headline inflation unexpectedly softened, making February the second straight month that the rate has stayed within in the central bank’s target range — the first time that happened since early 2021.

Even a broad range of core inflation metrics, which exclude volatile components like gasoline, are showing easing price pressures.

The Bank of Canada focuses on these measures as a guide to policy, and Governor Tiff Macklem has said he isn’t scrutinizing any particular metric but on the consistency in movements between them.

Policymakers have spent the past two months waiting for evidence to convince them to take their foot off the monetary policy brake, after they signaled they were done hiking in January. February data may have nudged them closer to an interest-rate cut. 

Replicating a measure of inflation breadth used by the Bank of Canada in its January monetary policy report, the weighted share of 165 components that are rising faster than 3% annually declined to 47.3% in February from 48.5% a month earlier. At the most detailed level, there are more than 300 components in the CPI basket, but the bank used aggregates in some cases.

Despite the progress, the breadth of inflation is above the historical average.

Rent and mortgage interest costs were the biggest components by weight that saw price gains above 3%, and they remain the biggest contributors to the annual change in the rate of headline inflation. Excluding shelter costs, the consumer price index rose 1.3% from a year ago. 

Restaurant meals, financial services, vehicle insurance premiums, electricity and fast food were also leading components by weight that accelerated faster than the upper end of the Bank of Canada’s target range.

Above-average breadth of inflation may give officials a reason to wait for two more inflation prints — for March and April — to make sure the downward path back to the 2% target could be sustained before they start easing. Both prints will be released before the Bank of Canada’s June 5 meeting.

Economists widely expect the central bank to start cutting rates at that meeting, following a clearer dovish signal at the upcoming April 10 meeting.


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