Bank of Canada to pay special attention to the latest inflation data

As the Bank of Canada considers raising interest rates at a slower pace, its focus will shift to the latest inflation measures. A slowdown in interest rate hikes could help the Bank of Canada avoid tightening beyond the levels needed to contain price pressures.

As a rule, inflation measures are presented on a year-over-year basis to smooth out fluctuations that appear in short-term measures. The Bank of Canada's decision to look at the latest data could help it adjust its key rate endpoint to do the least possible damage to the economy.

Compared to the so-called three-month measures of inflation, the Bank of Canada's key gauges of core inflation look encouraging when compared to year-over-year inflation measures.

The charts show that the three-month CPI median is down to about 4% in September, while the 12-month index rates have been at around 5% in recent months.

This is well above the Bank of Canada's 2% inflation target range. At the same time, this could be a sign that rate hikes are starting to slow down price pressures.

The headline rate, which includes volatile components such as energy, has already reached its peak.

Politicians, unions as well as some economists are concerned that the Bank of Canada could raise interest rates too aggressively, creating a toxic combination of high borrowing costs and inflation that is heavy on both consumers and small businesses.

The central bank raised its policy rate by 350 basis points to 3.75%, the highest rate in 14 years. The interest rate hike hit its 14-year high in just seven months.

Money markets expect the rate to peak at around 4.50% in the coming months. This endpoint is higher than previously expected.

According to Josh Nye, senior economist at Royal Bank of Canada, looking at monthly or three-month changes in inflation gives a better idea of ​​current price momentum and inflation behavior during interest rate changes.

Nye said that inflation will be more stable after it moves from the prices of goods to wages and services. The Bank of Canada has opened the door for a slowdown in the pace of tightening to more normal steps of 25 basis points.