Canada’s inflation rate slowed more than expected in January, primarily as the price of gasoline fell. Robert Both, Senior Macro Strategist at TD Securities, discusses the implications for interest rates and the Canadian economy with MoneyTalk’s Greg Bonnell.
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Canadian consumer price pressures eased more than expected in January. Motorists were paying less at the pumps. And so with headline inflation now below 3%, does that bring us any closer to the Bank of Canada cutting rates?
Joining us now to discuss is Robert Both, senior macro strategist at TD Securities. Robert, great to have you back on the program.
Thank you, Greg. It's my pleasure to be back in studio.
All right, so this is one of those kind of reports that I think the Bank of Canada has been waiting to see. Perhaps market watchers, inflation watchers have been waiting to see inflation below 3%. Take us through the report and what you found most interesting.
Yeah. So we had been looking for inflation to fall from 3.4% to 3.2%. The market was looking for an even smaller drop to 3.3%, so at 2.9%, this is a pretty material surprise. Generally, you don't see inflation move by maybe 1/10, 2/10 beyond what markets are expecting.
So the biggest takeaway from us was just the magnitude of the surprise. As you say, inflation is back into inside that 1% to 3% target range. That is the sweet spot that the Bank of Canada is looking for, but they're really looking for 2%, so we're not quite there yet.
There were a few larger moves that helped drive that deceleration. So airfares can be quite volatile, but those fell by nearly 25% month over month. We also saw a pretty large drag from things like travel services or hotels, things like clothing and household appliances, furniture-- those discretionary spending items.
So this does speak to the pressure that Canadian households are feeling, that squeeze on budgets starting to translate to reduced inflation pressures. But there were some positives as well for those that might not spend as much on discretionary items. Food prices still rising but by 0.1% month over month. That's a much smaller increase than we saw last year, so food inflation actually fell by quite a lot. It's now at 3.9% instead of 5%. So we are moving in the right direction, but we're not quite there yet.
Let's talk about looking under the hood. Obviously, we have broken down some of the segments there for the audience in the report. But some people will say, well, it's all good and well that headline inflation is below 3%. What about some of the core measures that the Bank of Canada watches? My first read is some of those appear to be moving in the right direction as well.
Yes, so the Bank of Canada does have tools to look past some of the volatility in headline inflation, but those core measures, those move lower as well. So the two that the Bank of Canada looks most closely at are the trimmed mean and the weighted median.
Those are now running around 3.3%. That's down from about 3.6% last month, still above that target range. And the Bank of Canada has also been pretty focused on where the three month rates of core inflation are going, just are those moving higher and pushing core inflation higher, or are those starting to signal more momentum to the downside?
Those three month rates of core inflation did fall as well. They're running at about 3.2%, so that does give us a little more confidence that that momentum is starting to break lower.
Yeah, a big part of the reason, of course, was we're paying less at the pumps compared to the same time last year in January. At the same time, we do know that when it comes to gasoline, when it comes to crude, and when it comes to geopolitical stress, this could be a volatile category. Could this be a wildcard going forward? I mean, depending what happens to the price of crude.
Certainly. So oil prices can be quite volatile. As you mentioned, they're not just affected by demand side, but as supply side factors as well, so geopolitical events can have a material impact on global crude supplies.
Going out beyond the next couple of months, we do expect oil prices to-- US oil prices to stay in that $82 to $84 range over the second half of 2024. That's a little bit higher than where they are right now, but we are not necessarily looking for those geopolitical risks to have a meaningful impact on crude oil prices. Those are simply risks to our base case.
Now, the Bank of Canada has another rate announcement. I believe it's March 6, so it's a couple of weeks away. We've got another inflation report now to put on their desk, although we have heard from Tiff Macklem repeatedly, when he gets a chance to talk to us through the media or other devices, to say give it some time.
We're not talking about rate hikes around the table anymore, but we're talking about how long we need to stay at these levels. So you get a report like this, you take a look at the economy. How long do they need to stay at these levels? What can we expect from them?
Right. So headline inflation is back into that 1% to 3% range, but the bank wants to see it at 2%. So this does move the goalpost a little bit closer. This is the first time we've seen inflation in that 1% to 3% range since last June. But as we saw last June, that tended to be a short-lived dip under that 3% upper limit.
Now, we are going to need to see more evidence to reinforce that this isn't another one of those short-lived dips, that this is a sustained return to the target range. So the bank is going to want to see more evidence of deceleration in those core inflation measures.
3.3%, it's much lower than they were last month, but those need to continue decelerating going forward. Likewise, we want to see that three month rate of core inflation ideally much closer to the midpoint of the target range.
So we're not there yet. We're still at 3.2%. A couple more months with similar data, we'll be getting closer, but we do think there is going to require more evidence before the Bank of Canada is in a position to cut rates. We continue to look for that first rate cut in July. So from the Bank of Canada's perspective, this is very welcome news, but their job isn't finished yet.
All right. So for July, so that pushes out into the summer, in terms of we enter this year, with some people thinking maybe spring. So if you're saying July, now we're firmly in the summer, after they finally do decide, OK, we're confident that we're getting closer to 2%, that it's going to be sustained. We're in a position to cut rates.
How many more rate cuts could we expect on the heels of that? Are they going to go cautiously, or are they going to say mission accomplished?
So we look for something in between. I think the Bank of Canada is going to proceed cautiously until the first rate cut. That is to say that they're going to want to see that evidence that we're clearly on that track towards 2%.
They're not going to declare a mission accomplished at the first sign that the target is getting closer, so we think the Bank of Canada is going to approach the decision to cut rates cautiously. But once they are ready to ease off the brakes a little bit and move policy closer to target, we do expect them to cut by 25 basis points at every meeting over the back half of this year.
Now, those are smaller moves than we saw on the way up, as the Bank of Canada was hiking rates.
--all those baby steps on the way up.
There were no baby steps. So by moving in 25 basis point increments on the way down, that's also a sign that the bank is being more cautious. They don't want to just bring policy from tight levels to neutral levels in one fell swoop.
They do want to move a little more gradually, so we think they get to 4% by the end of this year. And then we'll probably see the pace of rate cuts slow down over 2025 as well, so instead of cutting by 25 basis points at every meeting, we think they'll do one rate cut per quarter. [UPBEAT MUSIC]
Canadian consumer price pressures eased more than expected in January. Motorists were paying less at the pumps. And so with headline inflation now below 3%, does that bring us any closer to the Bank of Canada cutting rates?
Joining us now to discuss is Robert Both, senior macro strategist at TD Securities. Robert, great to have you back on the program.
Thank you, Greg. It's my pleasure to be back in studio.
All right, so this is one of those kind of reports that I think the Bank of Canada has been waiting to see. Perhaps market watchers, inflation watchers have been waiting to see inflation below 3%. Take us through the report and what you found most interesting.
Yeah. So we had been looking for inflation to fall from 3.4% to 3.2%. The market was looking for an even smaller drop to 3.3%, so at 2.9%, this is a pretty material surprise. Generally, you don't see inflation move by maybe 1/10, 2/10 beyond what markets are expecting.
So the biggest takeaway from us was just the magnitude of the surprise. As you say, inflation is back into inside that 1% to 3% target range. That is the sweet spot that the Bank of Canada is looking for, but they're really looking for 2%, so we're not quite there yet.
There were a few larger moves that helped drive that deceleration. So airfares can be quite volatile, but those fell by nearly 25% month over month. We also saw a pretty large drag from things like travel services or hotels, things like clothing and household appliances, furniture-- those discretionary spending items.
So this does speak to the pressure that Canadian households are feeling, that squeeze on budgets starting to translate to reduced inflation pressures. But there were some positives as well for those that might not spend as much on discretionary items. Food prices still rising but by 0.1% month over month. That's a much smaller increase than we saw last year, so food inflation actually fell by quite a lot. It's now at 3.9% instead of 5%. So we are moving in the right direction, but we're not quite there yet.
Let's talk about looking under the hood. Obviously, we have broken down some of the segments there for the audience in the report. But some people will say, well, it's all good and well that headline inflation is below 3%. What about some of the core measures that the Bank of Canada watches? My first read is some of those appear to be moving in the right direction as well.
Yes, so the Bank of Canada does have tools to look past some of the volatility in headline inflation, but those core measures, those move lower as well. So the two that the Bank of Canada looks most closely at are the trimmed mean and the weighted median.
Those are now running around 3.3%. That's down from about 3.6% last month, still above that target range. And the Bank of Canada has also been pretty focused on where the three month rates of core inflation are going, just are those moving higher and pushing core inflation higher, or are those starting to signal more momentum to the downside?
Those three month rates of core inflation did fall as well. They're running at about 3.2%, so that does give us a little more confidence that that momentum is starting to break lower.
Yeah, a big part of the reason, of course, was we're paying less at the pumps compared to the same time last year in January. At the same time, we do know that when it comes to gasoline, when it comes to crude, and when it comes to geopolitical stress, this could be a volatile category. Could this be a wildcard going forward? I mean, depending what happens to the price of crude.
Certainly. So oil prices can be quite volatile. As you mentioned, they're not just affected by demand side, but as supply side factors as well, so geopolitical events can have a material impact on global crude supplies.
Going out beyond the next couple of months, we do expect oil prices to-- US oil prices to stay in that $82 to $84 range over the second half of 2024. That's a little bit higher than where they are right now, but we are not necessarily looking for those geopolitical risks to have a meaningful impact on crude oil prices. Those are simply risks to our base case.
Now, the Bank of Canada has another rate announcement. I believe it's March 6, so it's a couple of weeks away. We've got another inflation report now to put on their desk, although we have heard from Tiff Macklem repeatedly, when he gets a chance to talk to us through the media or other devices, to say give it some time.
We're not talking about rate hikes around the table anymore, but we're talking about how long we need to stay at these levels. So you get a report like this, you take a look at the economy. How long do they need to stay at these levels? What can we expect from them?
Right. So headline inflation is back into that 1% to 3% range, but the bank wants to see it at 2%. So this does move the goalpost a little bit closer. This is the first time we've seen inflation in that 1% to 3% range since last June. But as we saw last June, that tended to be a short-lived dip under that 3% upper limit.
Now, we are going to need to see more evidence to reinforce that this isn't another one of those short-lived dips, that this is a sustained return to the target range. So the bank is going to want to see more evidence of deceleration in those core inflation measures.
3.3%, it's much lower than they were last month, but those need to continue decelerating going forward. Likewise, we want to see that three month rate of core inflation ideally much closer to the midpoint of the target range.
So we're not there yet. We're still at 3.2%. A couple more months with similar data, we'll be getting closer, but we do think there is going to require more evidence before the Bank of Canada is in a position to cut rates. We continue to look for that first rate cut in July. So from the Bank of Canada's perspective, this is very welcome news, but their job isn't finished yet.
All right. So for July, so that pushes out into the summer, in terms of we enter this year, with some people thinking maybe spring. So if you're saying July, now we're firmly in the summer, after they finally do decide, OK, we're confident that we're getting closer to 2%, that it's going to be sustained. We're in a position to cut rates.
How many more rate cuts could we expect on the heels of that? Are they going to go cautiously, or are they going to say mission accomplished?
So we look for something in between. I think the Bank of Canada is going to proceed cautiously until the first rate cut. That is to say that they're going to want to see that evidence that we're clearly on that track towards 2%.
They're not going to declare a mission accomplished at the first sign that the target is getting closer, so we think the Bank of Canada is going to approach the decision to cut rates cautiously. But once they are ready to ease off the brakes a little bit and move policy closer to target, we do expect them to cut by 25 basis points at every meeting over the back half of this year.
Now, those are smaller moves than we saw on the way up, as the Bank of Canada was hiking rates.
--all those baby steps on the way up.
There were no baby steps. So by moving in 25 basis point increments on the way down, that's also a sign that the bank is being more cautious. They don't want to just bring policy from tight levels to neutral levels in one fell swoop.
They do want to move a little more gradually, so we think they get to 4% by the end of this year. And then we'll probably see the pace of rate cuts slow down over 2025 as well, so instead of cutting by 25 basis points at every meeting, we think they'll do one rate cut per quarter. [UPBEAT MUSIC]