Canadian inflation warning: rising gasoline prices may lead to central bank interest rate cuts
Economists say that due to the rise in gasoline prices, inflation is expected to intensify again in February, which reinforces people's expectations that the road back to 2% inflation rate will be a bumpy one.
Statistics Canada is scheduled to release its February Consumer Price Index report on Tuesday. The consensus expectation among experts is a 3.1% increase compared to a year ago.
This will reverse some of the progress made in January, when the annual inflation rate slowed down to 2.9%.
Royce Mendes, Managing Director and Head of Macro Strategy at Desjardins, said: We expect inflation to accelerate again due to the rise in energy prices this month. In the coming months, inflation may fluctuate around 3%.
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Rising inflation will slightly complicate the situation for the Bank of Canada, and it is widely expected that the Bank of Canada will begin cutting interest rates in the coming months.
Mendes said that it is more important to observe indicators of underlying price pressure on Tuesday, which will help economists evaluate inflation trends.
Mendes said: The real problem is what is happening beneath the surface.
At the Bank of Canada's interest rate decision meeting earlier this month, Governor Tiff Macklem pointed out that almost half of the consumer price index components are currently rising at a rate of over 3%. In more normal inflation periods, only about a quarter of the CPI components will rise so quickly.
The central bank also emphasized the situation of economic and inflation trends in the monthly report.
At the same time, Macklem emphasized that the central bank does not want to cut interest rates too early, so it will wait until there is clearer evidence that inflation will soon return to the central bank's 2% target.
BMO Chief Economist Douglas Porter said that this will be A-level evidence for the central bank, explaining why we must remain cautious.
The Bank of Canada has kept its benchmark interest rate unchanged at 5% since July, awaiting further evidence that inflation is approaching 2%.
Its final forecast indicates that inflation will reach this target by 2025, and many economists agree with this prediction.
Porter stated that one of the uncertainties in these predictions comes from energy prices, which typically have a significant impact on overall inflation.
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He said that oil prices may fluctuate rapidly, making many inflation forecasts look quite foolish.
Tuesday's report will be the last inflation data before the Bank of Canada's interest rate announcement in April, which Porter called the key to the decision.
Although it is expected that the central bank will not change its benchmark interest rate next month, many forecasters expect the central bank to announce a rate cut at the subsequent June decision-making meeting.
Porter said, 'I think if the central bank is going to cut interest rates in June, they must send a fairly strong signal at the April meeting.'.
However, the chief economist stated that the central bank cannot guarantee anything because many things will happen within two months.
The federal government is scheduled to submit its budget one week after the interest rate decision in April, which may affect inflation expectations. The Bank of Canada will have two months of economic data to evaluate before making a decision in June.
Porter said: I think the central bank will be very cautious in the language they use.
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