“We saw some very welcome news there last month. Five-year forward inflation expectations dropped from the low 3% range to the high twos,” Stonehouse says. “But it’s going to be very important to monitor that going forward, and for central banks to keep that in check. I think it is going to be among the most important factors determining the pace of moderation.”
Getting inflation down to the 5% to 6% level, from its current 8% to 9%, would obviously be a plus. But in Stonehouse’s view, the Federal Reserve and the Bank of Canada wouldn’t feel comfortable declaring a victory in their inflation fight until it cools below 4% into the 3% range.
“They’ve certainly got the 1970s in the back of their mind. So there’s still more work to be done over the next few months before they start to feel that inflation is not becoming entrenched,” he says. “We may be past the peak of inflation, but if that doesn’t moderate fairly quickly, that still leaves the central banks needing to address this further, as they’ve been articulating over the last few months.”
In Canada, inflation still has the potential to rise. After Statistics Canada reported annual CPI reached 7.7% in May, the agency said it accelerated to 8.1% the following month. The CPI report for July, which comes after the BoC hiked its policy rate by 1% to reach 2.5%, is expected tomorrow.
“It’ll be interesting to see what the July data show. Fortunately, I think we’ll see a much better number on the energy front, just like we did in the States,” Stonehouse says. “But the overall core numbers are likely to still show some degree of rising … We’ve still got some work to do on that front.”
