Core inflation set to fall further

Two of the Bank of Canada’s three measures of core inflation, CPI-trim and CPI-median, declined in November. As a result, an average of the three measures fell to 1.9%, the lowest in five months. Base effects mean that core inflation will probably decline further in the next few months. Beyond that, the recent slump in hourly earnings growth suggests that core inflation is unlikely to rebound. According to the Labour Force Survey earnings growth declined to just 1.7% in November. On past form, that suggests that core inflation will fall towards 1.5%. Against a backdrop of a weakening economy due to the decline in oil prices, fading inflationary pressures are another reason to think that the Bank of Canada will take a cautious approach to future interest rate rises. We do not expect any more hikes from the Bank.