November 14, 2024
Q3 2024: Inflation Watch
In this issue, we discuss cooling inflation, price softness across several CPI categories and alternatives to RRBs in inflation hedging.
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Steve’s take: “Canadian inflation further cooled in Q3 as the year-over-year headline Consumer Price Index (CPI) decelerated to 1.6% (figure 1), 20 basis points (bps) below market consensus. The September report brings more good news on the inflation front, allowing the Bank of Canada to keep its focus on closing the output gap.”
Falling gasoline prices in September were the primary contributor to the easing of inflation. Overall, transportation prices decreased 2% year over year and had a -0.3% contribution to headline inflation (figure 2).
Softness extended beyond just gasoline, with shelter price increases slowing meaningfully to a still-elevated 5.0% year over year. With lower interest rates, mortgage interest cost inflation has decelerated, while rent prices have also eased.
Energy and goods excluding food and energy remain the main drags on year-over-year inflation, while shelter and other core services remain the largest upside drivers.
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
Figure 3: RRB trading volume
Bloomberg
Real return bond (RRB) trading activity was mostly light in Q3, consistent with trends seen since the Government of Canada’s cessation of RRB issuance in November 2022 (figure 3). However, a few days of increased trading were observed in September, including daily trading volume of $83M on September 12 and $71M on September 27. This is consistent with heightened activity in the indexed pension risk transfer space that we observed over the quarter.
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 widened from 47 bps to 58 bps (figure 4). This suggests that the cost of implementing a U.S. based inflation strategy has increased over the quarter.
Figure 4: US vs. Canadian 10-year breakeven inflation rates
Bloomberg
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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
RRB trading volume (figure 3)
Bloomberg
US vs. Canadian 10-year breakeven inflation rates (figure 4)
Bloomberg
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