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What is ‘core inflation’? This important number can gauge future rate hikes – National

Canadian title inflationary Rates are expected to slow again when the latest consumer price data for August is released on Tuesday, but economists say it is the underlying “core inflation” metric that Bank of Canada will pay close attention to find the altitude interest rate will have to go.

Analyst polled last week by Reuters is forecasting the Statistics Canada Consumer Price Index will cool to an annualized rate of 7.3% in August, down from the 7.6% seen in July and June which could hit a peak. is 8.1%.

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Economists who spoke with Global News this week agree that the number, often referred to as “headline” inflation, is likely to fall as gasoline prices continue their downward trend over the previous month.

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But one Report of the Royal Bank of Canada released on Friday projects that while headline numbers may have peaked, so-called “core inflation” has not.

This figure, in Canada, which is often estimated through an average of three separate indexes, hit an all-time high of 5.3% in July even as the overall CPI slowed. RBC estimates core inflation won’t peak until sometime in the fourth quarter of the year.

A Royal Bank of Canada analyst suggests core inflation may not peak until the fourth quarter of 2022.

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What is ‘core inflation’?

RBC assistant chief economist Nathan Janzen, who co-authored last week’s report with Claire Fan, said core inflation measures are intended to provide a “better gauge” of “persistent, potential” price pressures. hidden”.

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It is calculated differently worldwide, but overall, this metric excludes “volatile” items such as energy and food prices to provide a more reliable, long-term view of where where inflation is headed.

Because food and fuel are constantly subject to global price pressure – the war in Ukraine and global supply chains linked to COVID-19 pandemics are a few good examples – they haven’t been affected much by the Bank of Canada’s interest rate hikes.


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Core inflation indicators that exclude these items tend to be a better gauge of domestic demand – a price pressure that central bank policy has an impact on, Janzen said. .

“Even as some… global price pressures have started to ease as gasoline prices fall, domestic pressures are mounting and it’s really the kind of inflation that is clearly a problem for us,” he said. domestic central banks”.

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“Those core measures are meant to be a better measure of where inflation is than the headline price index. If you see them tick higher, it sends a notification that they need to do more to reduce demand. “

According to Benjamin Reitzes, managing director of Canadian exchange rates and macro strategist at BMO, if inflation were only caused by international factors, the Bank of Canada would not be forced to raise interest rates higher to reduce inflation. .

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But the “width” and “depth” of domestic inflation pressures are “unprecedented” over the past 20 years, he told Global News.

He pointed to a strong national economy, which the Bank of Canada said is operating “above capacity”, as driving demand for spending.

Janzen notes that much of the core inflation-driven demand is now in services. Canadians have had more than two years of pent-up demand for travel and other activities and are now using their bank savings, even as price pressures are high, he said.

What does core inflation mean for rate hikes? A recession?

The Bank of Canada will have two more opportunities to consider the temperature of core inflation before deciding on its next interest rate on October 26.

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Several major bank economists, including those at BMO and RBC, now expect the benchmark rate to hit 4% by the end of 2022, up from 3.25% now.

Reitzes said a hot pair of core inflation indexes will fuel another super-speedy rate hike next month.

“If inflation is hotter than expected, that will set off another very drastic rate hike. They most likely hit an extra 75 basis points,” he said.

The BMO is not currently forecasting a recession in Canada, but Reitzes noted that “the odds are going up.” If central bank rates eventually need to rise above the 4% line, the chances of the Canadian economy falling into a recession are likely to rise above 50%, he said.


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“I wouldn’t say it’s a done deal at this point, but with every strong inflation print that happens, the likelihood of a recession increases.”

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RBC, on the other hand, is calls for a “mild” but “short-lived” recession in early 2023.

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The problem with rate hikes, Janzen noted, is that they work quite slowly and that the Bank of Canada probably won’t know if it’s raising rates enough to cool down inflation until six months to a year later. reality.

“That increases the risk that they will have to make the mistake of hiking too much in the near term and push the economy into a moderate recession next year,” he said.

– with files from Reuters

© 2022 Global News, a division of Corus Entertainment Inc.

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