Canada Weekly: Markets overreacting to rise in core inflation in April

As expected, the removal of the carbon tax pushed headline inflation down to 1.7% in April, comfortably in the bottom half of the Bank of Canada’s 1% to 3% target range. Nonetheless, the acceleration of the Bank’s preferred measures of underlying inflation, CPI-trim and CPI-median, poses a risk to our view that the Bank will cut its policy rate to 2.5% next month and ultimately bring it down to 2.0% to support the economy. Indeed, markets are now pricing in just 30% chance of a cut in June and a year-end rate of 2.4%. The average of these two measures accelerated to 0.4% m/m in April. However, digging into what categories were responsible for this acceleration does reassure us that the Bank can justify a cut at their June meeting.