TORONTO: Key measures for underlying price pressures that the Bank of Canada is watching show broad disinflation progress, setting the stage for a pivot to easier policy.
Despite a large increase in gas prices last month, headline inflation unexpectedly softened, making February the second straight month that the rate has stayed within the central bank’s target range, the first time that has happened since early 2021.
Even a broad range of core inflation metrics, which exclude volatile components like petrol, are showing easing price pressures.
The Bank of Canada focuses on these measures as a guide to policy, and governor Tiff Macklem said he isn’t scrutinising any particular metric but on the consistency in movements between them.
Policymakers have spent the past two months waiting for evidence to convince them to take their foot off the monetary policy brake after they signalled they were done hiking in January.
February data may have nudged them closer to an interest rate cut.
Replicating a measure of inflation breadth used by the Bank of Canada in its January report, the weighted share of 165 components that are rising faster than 3% annually declined to 47.3% in February from 48.5% a month earlier.
At the most detailed level, there are more than 300 components in the consumer price index (CPI) basket, but the bank used aggregates in some cases.
Despite the progress, the breadth of inflation is above the historical average.
Rent and mortgage interest costs were the biggest components by weight that saw price gains above 3%, and they remain the biggest contributors to the annual change in the rate of headline inflation.
Excluding shelter costs, the CPI rose 1.3% from a year ago.
Restaurant meals, property taxes, vehicle insurance premiums, electricity and fast food were also leading components by weight that accelerated faster than the upper end of the Bank of Canada’s target range.
Above-average breadth of inflation may give officials a reason to wait for two more inflation prints, for March and April, to make sure the downward path back to the 2% target could be sustained before they start easing. — Bloomberg
