Bank of Canada walking a 'tightrope' as analysts forecast inflation jump in February

financialpost.com:

People banking on an interest rate cut may not like the direction Canadian inflation is heading if analyst expectations prove correct.

Bloomberg analysts expect inflation to reaccelerate to 3.1 per cent in February when Statistics Canada releases its latest consumer price index (CPI) data on Tuesday, following a slowdown to 2.9 per cent year over year in January.

CPI core-trim and core-median, the measures the Bank of Canada is most focused on, are forecast to come in unchanged from the previous month at 3.3 per cent and 3.4 per cent, respectively.

Policymakers made it clear when they held interest rates on March 6 that inflation remained too widespread and persistent for them to begin cutting.

Here’s what economists are saying about tomorrow’s inflation numbers and what they mean for interest rates.

The Bank of Canada’s preferred measures “have become biased,” Royce Mendes, managing director and head of macro strategy, and Tiago Figueiredo, macro strategist, at Desjardins Financial, said in a note on March 18, “likely overestimating the true underlying inflation rate.”

They said the central bank’s preferred measures of core-trim and core-median inflation are stripping out items in the CPI basket of components whose prices are decelerating negative five per cent to zero per cent, represented primarily by goods. After adjusting for the “biases,” they estimate the bank’s measures are more in the neighbourhood of three per cent — which is at the top of the bank’s inflation target range of one to three per cent.

“If the Bank of Canada ignores our findings, officials risk leaving monetary policy restrictive for too long, inflicting unnecessary pain on households and businesses,” they said.

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