Bank of Canada's inflation 'buffet' muddies timing of interest rate cuts
The Bank of Canada says it’s watching core inflation closely as it weighs when to cut interest rates, but a mixed bag of measures gives it options on timing and clouds the outlook for markets and economists.
The central bank has no less than six indexes it monitors to get a grasp on underlying price pressures. Governor Tiff Macklem has pushed back against focus on a specific indicator, describing core inflation as more of a “concept.”
While that reflects the bank’s need for certainty before declaring victory over inflation, it can also limit transparency — there’s no lodestar key to policymakers’ thinking that would compel them to cut.
“The bank can always find a number to suit its narrative,” Benjamin Tal, deputy chief economist at the Canadian Imperial Bank of Commerce, said.
“You never know on which side of the bed they’ll wake up.”
Core inflation measures are important guideposts for economists — they’re meant to strip out more extreme price fluctuations to provide a better sense of where price pressures are headed. Food and energy, for example, are volatile goods with month-to-month changes that don’t necessarily represent the broader inflation trends.
The bank can always find a number to suit its narrative. You never know on which side of the bed they’ll wake up
The average of two of the bank’s preferred metrics, CPI-trim and CPI-median, ticked up to 3.65 per cent year over year in December from an upwardly revised 3.55 per cent a month earlier. The release prompted traders to push back bets on Canada rate cuts — and after Tuesday’s hot U.S. inflation report, markets are not fully pricing in a cut until September.
But Macklem has said he wouldn’t put a specific number on what level of core inflation would prompt a
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