Quicknote: Canadian inflation starts to cool, will it flow through elsewhere?

We’ve been watching Canada for the past six months very closely. One of the main reasons is the fact that the Bank of Canada paused its rate hikes earlier than peers. We saw that as a potential forward indicator for what other central banks, particularly in Australia and the United Kingdom, could do.

The Bank of Canada’s pause was questioned at the time, but it seems to have been vindicated overnight by lower than expected inflation numbers. The trimmed mean came in at 0.5% monthly, which was below expectations of 0.8%.

The headline monthly rate of 0.4% was also below expectations of 0.5%. These aren’t blowout figures and inflation is still too high, but they tend to suggest that the trend has stopped rising and inflation is now under control. Food inflation is still problematic and too high, but it seems that higher rates in Canada are starting to put downward pressure on other segments.

Bottom line: The inflation fight is not yet over and recent banking turmoil is yet to materialise into lower inflation. But Canada is usually a few months out of its peers, and we think this now sets a similar tone for the RBA to pause next month.

All eyes are on the US Fed in the next few hours to see if they pause or go through with another 25 basis point hike. Either way, we think that a pause and reversal in rate expectations is now a given as priced by the bond market.

We continue to think rates have peaked in this cycle.

Peter Esho is an economist and Founder of Esho Research. He has 20 years of experience in investments and markets.