Canadian inflation fell below expectations in November, falling from 2.0% to 1.9% year-on-year. Despite this, there is enough support in today’s data for the Bank of Canada to prove the easing slowdown announced earlier this month, with the Bank of Canada’s preferred core inflation metrics remaining steady, above 2.0%.
Accordingly, we continue to anticipate short-term caution from the Board, suggesting a 25 basis point rate cut in January as the most likely next step. But the longer-term trajectory of both interest rates and inflation must be determined primarily by the tariffs Trump imposed, or lack thereof, later in the New Year.
However, the lack of change in average core inflation and reduced core inflation is likely to attract the Board’s attention for now. Both readings remained unchanged from October’s revised readings upwards at 2.6% and 2.7%, respectively.
This inflationary stability, together with its recently announced fiscal stimulus package, largely justifies the Bank of Canada’s tighter guidance on interest rates earlier this month. However, it is also consistent with our fundamental situation, which sees a false dawn for the Canadian economy heading towards the end of the year.
In fact, given the details of today’s inflation report, we still believe there is cause for concern. While the Bank of Canada’s preferred core inflation metrics still look flat, other indicators do not. Inflation excluding food and energy costs fell below 2.0% for the first time since April 2021. Meanwhile, the CPI excluding rental and mortgage costs, our preferred measure of core inflation, fell to 0.7% year-on-year, down from 0.8% in October, and remained well below target.
Market Reactions to the Latest Monthly Canadian CPI Data
The month-on-month publication of Canadian CPI data indicating a flat change of 0.0% triggered waves of turmoil in financial markets. Initially, markets expected a slight increase in consumer prices, with expectations indicating a rise of 0.1% after a previous increase of 0.4%.
However, the actual result fell short of expectations and led to cautious sentiment among investors. The lack of upward movement in the CPI has raised concerns about the sustainability of Canada’s economic recovery and has implications for future policy decisions by the Bank of Canada.
Following the publication of the data, the Canadian dollar experienced fluctuations against major currencies, especially the US dollar. A slump in the CPI could lead to a reassessment of inflation expectations, which could prompt the Bank of Canada to reconsider its stance on raising interest rates. This uncertainty is reflected in volatility in the Canadian dollar as traders adjust their positions based on perceived risks of future changes in monetary policy.
In addition, the bond market reacted to CPI data, as yields on government bonds reflected a more cautious outlook among investors. A lack of inflationary pressures could lower expectations of interest rate increases, making Canadian bonds more attractive to fixed-income investors than riskier assets.
Moreover, the stock market also showed mixed reactions. Sectors sensitive to consumer spending, such as retail stocks and discretionary consumer goods, saw slight declines as the fixed consumer price index raised concerns about consumer demand.
On the other hand, utilities and basic consumer goods – usually seen as defensive sectors – saw stability or minor gains as investors sought safety amid uncertain economic indicators. Overall, the spot market reaction to the Canadian CPI report on a monthly basis suggests a cautious approach, with many market participants looking for more data to assess underlying economic conditions.
Forecast for the current month of the monthly Canadian CPI
Looking ahead, the outlook for the Canadian CPI for the current month is mixed, with analysts and economists divided on whether inflationary pressures will begin to emerge or whether the steady trend will continue. One of the key considerations for the upcoming report is the evolving landscape of consumer behavior and demand.
As the economy continues to recover from the effects of the pandemic, many are watching signs of renewed spending. If consumer confidence improves and spending increases, it could lead to upward pressure on prices, which could lead to a positive CPI reading on a monthly basis.
Moreover, analysts are closely monitoring global economic conditions, especially as supply chain problems continue to affect various industries. If the disruptions continue, they could contribute to the scarcity of certain products, which could lead to higher prices. Conversely, if supply chains stabilize and production increases, it could counteract inflationary pressures and maintain the inflation trend.
In addition, labor market dynamics cannot be ignored. Recent employment figures have shown signs of stabilization, but wage growth has been uneven across sectors.
While some industries are experiencing strong wage increases due to labor shortages, others remain stagnant. This uneven wage growth can lead to divergent spending habits among consumers, further complicating inflationary pressures. If consumers do not see steady increases in disposable income, their spending behavior may reflect cautiousness, leading to slower price growth across sectors.
Moreover, the impact of energy prices has played a crucial role in shaping CPI trends. Fluctuations in oil and gas prices directly affect transportation costs and, consequently, the prices of goods and services. In the previous month, energy prices showed volatility, but overall did not contribute significantly to inflationary pressures. With energy prices stabilizing
