Canadian Dollar: Inflation risks and BoC stance – TD Securities

TD Securities economist Robert Both anticipates Canadian CPI to reach 3.2% year-on-year in September, primarily due to increased energy and gasoline costs. Core inflation indicators like CPI-trim and median are expected to stay around 1.9%. This moderate core profile should keep the Bank of Canada from making significant adjustments, even if new inflation predictions in the October Monetary Policy Report are raised for headline CPI.

The forecast suggests CPI will grow 0.1 percentage points to 3.2% year-on-year in September (+0.2% month-on-month) thanks to another substantial surge from energy. Core CPI is not anticipated to display any substantial price pressure expansion, with CPI-trim and median projected to slightly decline to 1.9% year-on-year. The subdued core CPI performance should result in a more balanced Bank of Canada message in October with minimal impact from high oil prices.

Headline CPI is projected to surpass the target range by 0.1 percentage points to 3.2% year-on-year in September, increasing 0.2% month-on-month. According to our projection, CPI-trim will remain at 1.9% year-on-year in September, while the weighted median will be 0.1 percentage points lower at 1.9%. This would bring CPI-trim/median back to its 2026 low, despite 3-month rates of core inflation at 2.7% indicating a more hawkish outlook.

While the Bank has relied on those 3-month rates of core CPI in past scenarios where momentum shifted swiftly, we believe that 2.7% does not meet the criteria for the BoC to act, particularly following renewed labor market weakness.