Cooper: No signs of inflation slowing down despite weaker spending.

Inflationary pressures give the central bank greater impetus to maintain its trajectory, economist says

Currently, there is no evidence that Canada’s core inflation rate is moderating despite the slowdown in housing and consumer spending, according to economist Sherry Cooper.

The latest data from Statistics Canada showed that the annual inflation rate only had a minor drop from 7% in August to 6.9% in September.

“Price pressures might have peaked, but [the latest numbers] will not be welcome news for the Bank of Canada,” Cooper said.

“The average of the bank’s favourite measure of core inflation remains stuck at 5.3%. Combined with the governor’s recent harsh rhetoric, the high probability that the Fed will hike rates 75bps at the next Federal Open Market Committee Meeting and the weak Canadian dollar, there is no doubt the bank will increase their overnight policy target to at least 3.75%, and could well go the full 75bps to 4.0% next week.”

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Cooper added that the inflation figures give the central bank greater impetus to maintain its outsized rate-hike trajectory beyond the next few meetings.

“I would bet that they will not quit there, with further hikes to come in December and next year by central banks worldwide,” Cooper said. “The government of Canada yield curve is now steeply inverted, reflecting the widely held expectation that the economy is slowing.”

Cooper concluded that Canada is unlikely to experience lower rates in 2023, since inflation pressures will almost certainly remain “very sticky”.

“The prime rate will increase sharply next week, increasing variable mortgage rates again,” Cooper said. “Fixed mortgage rates will rise as well, but not by as much, continuing a pattern we’ve seen since March when the Bank of Canada began the current tightening cycle.”