Today’s CPI release for October saw headline print at 4.7% YoY in October, up from 4.4% in September and in line with the consensus expectation. This marks a 0.7% MoM NSA growth in prices in October, while the average of the core measures held steady at 2.67%.
On the surface, the data print is largely disappointing from a market perspective despite headline CPI printing at its highest rate since February 2002. Firstly, the CPI print fell in line with expectations at a time when US CPI rose to levels not seen since the early 90’s, while other CPI readings for October are outstripping economists’ already bullish expectations such as UK CPI this morning. Secondly, the core-common measure of CPI, regarded as one of the better measures of underlying inflation, stayed stable at 1.8% despite many expecting it to show increased underlying inflation pressures. This all weighed on the loonie at the margin, with USDCAD rising towards its 6-week high of 1.26048 following the release.
Composition of today’s CPI report shows most of the CPI increase from September was driven by increases in Energy related goods
Taking a deeper dive into the Canadian CPI data, it is more bad news for those positioned at the ultra-bullish end of the BoC spectrum. Most of the increase in CPI from September’s reading of 4.2% to October’s 4.7% was due to energy related components, namely the 8.83% monthly rise in Gasoline when measured in annual terms, and the 1% rise in transportation costs. The only large change in components not directly related to the price of energy was in recreation, education, and reading, which can also be attributed to base effects as lockdown measures still weighed on this category in October 2020. On a monthly basis, inflation momentum has been building on a sequential basis, with the monthly rise in all-items ex food and energy measure rising to 0.44% from a prior two readings of 0.22%.
While today’s data continues to fall in line with our view that the BoC will conduct their first interest rate hike at April’s meeting, it does little to clear up the uncertainty over the future path of rate increases.
Such malaise in the Canadian economic outlook has been shared by Governor Macklem and Deputy Schembry so far this week. With today’s CPI data falling in line with expectations and largely driven by rising energy factors, it has proven a limited tonic at a time when other CPI readings have emboldened calls for earlier policy normalisation in the US and UK.
Yields on the Canadian 2-year drop as today’s CPI release does little to shore up expectations of rate hikes beyond the initial lift-off point
Author: Simon Harvey, Senior FX Market Analyst