PM spotlight

Steve Morris, CFA, Senior Managing Director & Portfolio Manager



Steve’s take: “Accelerating core inflation measures show that underlying price pressures remain, which may push back the expected date for the first rate cut from the Bank of Canada. As of December, headline CPI increased 3.4% year-over-year (figure 1), in line with market consensus. This continues to be above the control range of 1%-3%. The increase in year-over-year inflation seen in December was somewhat expected as the large decrease in energy prices last December created a strong base year effect.”


Shelter continues to be a major driver of headline inflation, contributing 1.7% to year-over-year inflation (figure 2). Price growth for both rented and owned accommodation accelerated year-over-year, increasing by 7.5% and 6.7% respectively.  

Food price inflation appears to be stubborn, with prices increasing by 5.0% year-over-year, matching November’s reading.

Gasoline prices fell month-over-month but rose 1.4% year-over-year due to base year effects caused by the large decrease in energy prices last December. The year-over-year increase in gasoline prices was a key determinant in pushing headline CPI higher in December.

Figure 1: CPI Change

12-month, YTD, and MoM change in the Statistics Canada Consumer Price Index, monthly, not seasonally adjusted (Table 18-10-0004-01)

Figure 2: Canada headline CPI contribution year-over-year

Bank of Canada Consumer Price Index Portal



Steve’s take: “With decreasing liquidity in real return bonds (RRBs), strong dealer relationships and market experience is a key factor in being aware of opportunities to obtain significant allocations and implementing new RRB mandates at efficient prices.”


Figure 3: RRB Trading Volume


RRB trading activity was light in Q4, consistent with trends seen since the Government of Canada’s cessation of RRB issuance in November 2022 (figure 3). Daily trade volume was mostly light over the quarter except for a few days in increased trading in December, including daily trading volume of $87M on December 21st. This was potentially prompted by heightened activity in the indexed pension risk transfer space.

We continue to monitor entry points for clients who are considering using alternatives to RRBs to hedge Canadian inflation, including U.S. TIPS and inflation swaps. Over the past quarter, the gap between 10-year breakeven inflation rates in the U.S. and Canada narrowed from 54 bps to 40 bps (figure 4). This suggests that, while implementing a U.S. based inflation strategy remains relatively expensive, market conditions have improved.

Figure 4: US vs. Canadian 10-year breakeven inflation rates


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CPI change (figure 1)

12-month, YTD, and MoM change in the Statistics Canada Consumer Price Index, monthly, not seasonally adjusted (Table 18-10-0004-01)

Canada headline CPI contribution year-over-year (figure 2)

Bank of Canada Consumer Price Index Portal

Breakeven inflation rates (figure 3)


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