BoC focuses on inflation data as rate hikes slow

The Bank of Canada focus on timely inflation data lowers overshoot risk, which could help it avoid tightening beyond the level needed to subdue price pressures, as the Bank of Canada considers raising interest rates at a slower pace.

Inflation tends to be reported on a year-over-year basis to smooth out fluctuations that occur in shorter-term measures. The BoC's move to consider the most recent data could help it refine an endpoint for the policy rate that does the least damage to the economy, as price pressures show signs of peaking, according to analysts.

Some forecasters believe that Canada's economy will dip into recession next year, along with a downturn in global activity.

Consumer prices are compared to levels that prevailed three months ago - so-called three-month measures of core inflation that the BoC tracks look more encouraging than they do when presented on a year-over-year basis, charts the central bank included in its October 26 economic update.

The charts show three month CPI-median and CPI-trim measures cooling to a pace of around 4% in September compared to the level of 5% that has persisted for 12 month rates in recent months.

That's well above the 2% midpoint of the BoC's inflation target range, but the step in the right direction could be a sign that rate hikes are beginning to slow underlying price pressures.

The headline rate, which includes more volatile items such as energy, has come off its peak.

It's not enough to bet the farm on, but it's encouraging that these super core' measures of inflation are closer to the top of the Bank of Canada'sBank of Canada's 1% to 3% target range for inflation, said Royce Mendes, head of macro strategy at Desjardins.

The central bank is now paying attention to these measures, which means there's a lower probability of overtightening relative to what's needed to control price pressures. Politicians, unions and even some economists worry that the BoC could raise interest rates too aggressively, leading to a toxic combination of borrowing costs and inflation that is too much for consumers and small businesses to bear.

The central bank has risen its policy rate by 350 basis points in just seven months, including multiple oversized hikes or rate increases in excess of a quarter of a percentage point, to a 14 year high of 3.75%.

Money markets are expecting that rate to peak at 4.50% over the coming months, a higher endpoint than previously expected after a blowout domestic jobs report on Friday.

Josh Nye, senior economist at Royal Bank of Canada, said that looking at monthly or three month changes gives you a better idea of current price momentum and how inflation is responding to changes in interest rates.

The price growth that occurred earlier in the year was included in the twelve month rate, according to economists.

Inflation is likely to be more persistent after it spreads from goods prices into slower moving items, such as wages and services. The BoC has opened the door to slowing down the pace of tightening to more normal steps of 25 basis points.

Andrew Kelvin, Chief Canada strategist at TD Securities said that this is the kind of chart that people will look at to motivate more dovish approaches.

The inflation will continue to decelerate, and the implication is that it will continue to decelerate.