Is Canadian Core Inflation About To Crack? July Data Could Offer Hope

• The Bank of Canada's most favoured measures of core inflation is likely to slow in July for the first time in 10 months as base effects work in their favour, a milestone that could sway the bank to leave rates on hold at its next policy decision.
• In tracking core inflation, the BoC has been particularly focused on the annualized three-month rates of the weighted median and the trimmed mean, which filter out components with extreme price movements and are more timely than the year-over-year rates that are typically observed. The average of those two measures would drop in July below the 3.5% to 4% range it has been stuck in since September, so long as the monthly increases are not too hot - above 0.3%, for example - Reuters calculations show.
• The monthly increases for both measures have been 0.3% or less in seven of the last eight months. The exception was April. Helpfully, its heated readings will drop out of three-month calculations in July. Such an outcome could see the BoC returning to the sidelines at its next interest rate announcement on Sept. 6, said Benjamin Reitzes, Canadian rates & macro strategist at BMO Capital Markets.
• Holding rates steady in September would not guarantee the tightening cycle has ended, economists say, noting that monthly increases of 0.2% and less for the preferred core measures would need to become commonplace for inflation to move back to the BoC's 2% target.
• The BoC, which will release minutes from its July meeting on Wednesday, has said it doesn't want to tighten more than is needed. Money markets see a 25% chance of a September hike and are pricing in a 75% chance of a move by the end of the year.

(Source: Reuters)