Canada’s inflation Preview: The Bank of Canada set to follow Big Brother with inflation accelerating

• Canada’s headline inflation is expected to accelerate to 2.9% over the year in September while core inflation is set to rise by 1.8% y/y.
• Retail sales in Canada are expected to rise 0.4% over the month in August with core sales excluding auto sales are set to fall -0.2% m/m.
• The Bank of Canada is expected to join the Fed and hike target for the overnight rate to 1.75% on its Monetary policy meeting next week, October 24.

The Bank of Canada core inflation gauge is expected to accelerate slightly in September to 1.8% y/y while headline inflation remains well above the target at 2.9% y/y. While headline inflation is set to remain energy prices driven, the Bank of Canada is expected to keep the monetary policy stance hawkish as headline inflation is well above the 2% target and the core measure of inflation is set to accelerate.

“We are Canada's central bank and we work to preserve the value of money by keeping inflation low and stable,” states the mission of the Bank after opening its website. Digging in its last monetary policy decision, the importance of the core inflation measure is highlighted by the Bank saying: “the Bank’s core measures of inflation remain firmly around 2%, consistent with an economy that has been operating near capacity for some time.”

As the Bank of Canada is scheduled to meet on October 24 next week, it will take a big miss on the core inflation gauge to alter current market expectations of 25 basis point rate hike next week.

The line-up for the Bank of Canada hiking rates is almost perfect. The economy is in Bank’s own view operating near full capacity, the employment is rising and the headline inflation is well above the target. Moreover, the Big Brother over the lakes (meaning US Federal Reserve) on the south has already hiked rates in September, so now it is the time for the Bank of Canada to follow.

Both rates hikes by the Bank of Canada this year were done during meetings releasing the Monetary Policy Report in January and in July and this is the last meeting releasing the report this year, so this is basically the last chance for the Bank of Canada to hike rates this year and have a press conference at their disposal after the policy meeting to justify the move. 

Regardless of how retail sales report does on Friday, October 19, it is the inflation rate as the primary target of the monetary policy in Canada to decide upon policy path in near future. 

Canada’s inflation