Despite Upbeat CPI Report, BoC Rate Hike Unlikely For March
Sebastien Lavoie | Feb 23, 2018 10:57
Total CPI strongly rose by 0.7% m/m in January, above market expectations (0.5% m/m).
Several drivers explain this surge in the CPI. Energy prices jumped by 0.6% m/m during the month, partly fuelled by Alberta’s new carbon tax. Mortgage costs also increased by 0.6% m/m, somewhat driven by the last Bank of Canada hike. Furthermore, there is evidence that restaurant owners in Ontario passed on some of the minimum wage hike to consumers, as the food prices in restaurants surged by 0.9% m/m nationwide. In Ontario, total CPI rose by 0.9% m/m and accelerated on a year-over-year basis to 1.8%, led by the food CPI item (+1.4% m/m).
These CPI subcomponents do not explain the entire 0.7% surge in the CPI. Indeed, our breakdown analysis of the CPI shows a more generalized acceleration in inflation. In January 2018, fewer sub-components declined on a year-over-year basis compared with 2017. Moreover, a larger number of sub-components increased at a faster pace than the 2% target, a development we haven’t seen in a very long time (see table below).
Given this upward inflationary dynamic, it is not surprising to find out that the three core inflation measures continue to move up. They averaged 1.8% in January 2018 (see chart below), compared to 1.7% in December and the 1.4% through of mid-2017.
Bottom Line: This upbeat CPI report increases the odds of seeing a BoC hike during the first half of 2018 rather than only in the second half. This being said, it would be surprising to see the BoC raises its policy rate on March 7th. In our opinion, it is preferable for BoC officials to remain cautious in the near term due to NAFTA uncertainty, the loss of competitiveness among Canadian companies triggered by the U.S. tax reform and the lagged impact of previous interest rates increases on indebted households.
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