By Ketki Saxena
Investing.com -- After U.S. CPI threw a wrench into equity markets this week, cooling less than had been forecast by economists, investors in Canada will now be looking ahead to next week’s domestic inflation figures.
Canadian CPI for August is expected at 8:30 a.m on Tuesday and will be widely watched for indicators on the Bank of Canada’s next move.
Economists at RBC (TSX:RY) now expect Canadian inflation to cool for a second month in a row, with inflationary pressures easing with gasoline prices. RBC expects a 7.2% reading in August, compared to 7.6% in July and the recent 8.1% peak seen in June. Looking beyond the headline numbers, however, RBC expects core inflation measures to remain elevated, and for inflation excluding volatile items such as food and energy to hold steady at 5.5%.
RBC economists Claire Fan and Nathan Janzen note, “We continue to believe the headline inflation rate has hit its peak as lower commodity prices and easing global supply chain pressures lower growth in goods prices. But we don’t expect ‘core’ measures to peak until later this year when higher interest rates start to cut deeply into consumer demand.”
In the face of still-accelerating core-inflationary measures, RBC has recently indicated that it expects the Bank of Canada to have rates at or above 4.00% by year-end, calling for two consecutive 25 bps hikes from the Canadian central bank at its upcoming policy meetings in October and December.
The Bank of Canada recently raised its overnight rate by another outsized 75 bps earlier this month, bringing the total increases to 300 bps since the current hiking cycle began in March.
The RBC economists note that “Overall, the bank’s ongoing commitment to keep tightening monetary policy in the face of stubbornly high inflation pressures should further stall consumer demand and inflation pressures—but not without pushing the economy into a moderate recession.”
RBC, which has long called for a “mild” recession in Canada next years, cites the already-visible impact of the downturn in the domestic economy, citing August’s drastic decline in the resale of housing units, an expected slowdown in manufacturing sales, as well as “StatCan’s advance estimate for a 0.1% contraction in real GDP in July and a 2% decline in retail sales”.
RBC warns that the Canadian economy is likely to see more pain in the coming quarter, noting that “Overall, the bank’s ongoing commitment to keep tightening monetary policy in the face of stubbornly high inflation pressures should further stall consumer demand and inflation pressures—but not without pushing the economy into a moderate recession.”