In this issue, we discuss the continued increase in headline CPI, a burst in RRB trading volume in Q3, and why implementing a U.S. based inflationary strategy could be expensive for Canadian investors.
Steve’s take: “The disinflationary process remains underway, but has been slow and bumpy. As of September, headline CPI increased 3.8% year-over-year (figure 1), above the control range of 1%-3%. The increase in year-over-year inflation in Q3 was expected due to base effects from last year and can largely be explained by energy. Core measures have remained sticky around 3.5%-4% on a year-over-year and quarter-over-quarter annualized basis.”
Shelter continues to be a large driver of headline inflation, contributing 1.7% to year-over-year inflation (figure 2). We have seen some recent acceleration in rent of primary residence and owned accommodation in Canada.
Price growth for groceries continued to decelerate in September but remained above headline inflation, rising 5.8% year-over-year vs. 6.9% in August. The deceleration was driven by year-over-year slowdowns in price increases for meat and dairy products, which increased 4.4% and 4.0% respectively.
Gasoline prices rose 7.5% year-over-year largely due to unfavourable base year effects, offsetting the deceleration in CPI.
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.”
RRB trading frequency and lot sizes have decreased significantly since the Government of Canada’s November 2022 announcement of their decision to cease RRB issuance (figure 3). While we continue to see low trading frequency and volume on most days, we experienced four days of significant RRB trading activity (daily trade volumes > $70M) in Q3, suggesting investors may still have opportunities to increase their RRB holdings if desired.
As RRB liquidity becomes further challenged, our clients are considering alternatives to RRBs to hedge Canadian inflation, including U.S. TIPS and inflation swaps. We are closely monitoring entry points for these clients. Over the past year, the gap between breakeven inflation rates in the U.S. and Canada has widened by 20 bps (figure 4), suggesting that implementing a U.S. based inflation strategy is relatively expensive. As market dynamics in this space change rapidly, we will evaluate whether more favourable entry points may emerge going forward.
Figure 3: RRB trading volume
Bloomberg
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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SLC-20231109-3217384
