Jump in Canadian inflation argues against rate cuts

Markets are beginning to price in Bank of Canada easing over the coming months, but for the time being, the latest inflation data argues against imminent rate cuts.

Headline inflation came in considerably on the upside rising 2.4% YoY in May, despite the ongoing drag from gasoline prices. Statistics Canada reported that gains were broad-based across all eight major components, with shelter, food and transport seeing heavy upward contributions. More importantly, the Bank of Canada’s three main measures of core inflation reached their highest average since February 2012.

This better inflation trajectory comes as the domestic economic outlook is starting to look a little brighter. The lagged effect of the late-2018 oil price decline has largely worked its way through, and while prices have taken a hit over recent weeks, our commodities team expect them to edge higher through this year and next.

Meanwhile, the labour market is looking strong, and we expect some better news on exports and the housing market later in the year too. With the improved core inflation backdrop, there are few domestic reasons to ease monetary policy at this stage.

However, the external environment is looking a little trickier. We expect the Federal Reserve to signal rate cuts are coming at its meeting later today, while there is little optimism surrounding the global trade outlook. Our team expects little to come of the meetings planned between the US and China at next week's G20 summit.