What is Canada’s Inflationary Picture?

The core inflationary outlook is closing in on the estimates the Bank of Canada (BoC) has projected. While the target rate of 2% annual inflation may sound modest, overall inflation measures are running above the Bank of Canada mid-point target on a 6-month annualized basis (CPI-Trim at 2.3% and CPI-median at 2.2%). We believe this recent trend will persist reflecting a strong economy and labour market.

Yield Curve Changes in 2018

Sustained low inflation is self-reinforcing. If businesses and individuals are confident that inflation is under long-term control, they do not react as quickly to short-term price pressures by seeking to raise prices and wages. This helps to keep inflation low. Are we in a period of sustained low inflation? It appears as bond market spreads have flattened at the long end of the curve with less than 25 basis points separating 10 years from 30 years maturities a transition is underway. This should alert investors to transitions in the economic cycle.

Canadian Yield Spreads February 2018
Canadian Yield Spreads February 2018

For a detailed analysis from our partners at National Bank Financial Economics, enjoy this review: https://www.nbc.ca/content/dam/bnc/en/rates-and-analysis/economic-analysis/economic-news-cpi.pdf