Central bankers captain enormous economies that are akin to supertankers. These vessels possess massive momentum, requiring three to ten miles and 15 minutes to stop. Similarly, economies are so vast that monetary policymakers sometimes cannot steer away from economic icebergs swiftly enough.
This scenario may be unfolding currently. The iceberg ahead is inflation, and the Bank of Canada and U.S. Federal Reserve appear to be hoping it dissipates before their economies collide with it.
The Reality of Our Situation
Recent gauges reveal the following about annual inflation rates and one-month movements. U.S. data is included because the Bank of Canada cannot ignore its southern neighbor when formulating policy:
- Canadian inflation: 2.4 per cent, up 0.6
- U.S. inflation: 3.3 per cent, up 0.9 in one month
- Canadian gasoline: up 21.2 per cent (largest monthly increase on record)
- Bank of Canada April inflation estimate: 3 per cent (due partly to base effects from carbon tax removal in April 2025)
- Business one-year inflation expectations: 3.8 per cent, up 0.8
- Business two-year inflation expectations: 3.4 per cent, up 0.6
- University of Michigan one-year inflation expectations: 4.7 per cent, up 0.9 (U.S. data)
- Cleveland Fed nowcast core PCE: 3.28 per cent
- Canadian average core inflation: 2.25 per cent, down 0.05
- Canadian producer prices: 7.8 per cent, up 2.2 (in one month)
- U.S. core PCE inflation: 3.2 per cent, up 0.2 (a more than two-year high)
- U.S. producer prices: 4.0 per cent, up 0.6 (highest in three years)
- U.S. five-year breakeven inflation rate: 2.7 per cent, up 0.1 (market's rough expectation of average annual inflation over next five years)
- U.S. trimmed mean inflation: 2.4 per cent, up 0.1
This list contains many upward movements.
The trimmed mean is the favored inflation gauge of incoming Fed chair Kevin Warsh, soon to be the world's most powerful banker. The Fed chair's preferred yardstick often becomes everyone else's. Like most core measures, the trimmed mean will need more time to fully reflect soaring energy costs. Barring a major drop in crude prices this quarter, however, an increase is expected.
If traders see U.S. core measures rise much more, U.S. government yields could go vertical, and Canadian rates would likely follow. Meanwhile, the Bank of Canada has pledged to government and citizens to wrestle inflation back to two per cent. However, its supposedly preferred measure, average core inflation, has not reached two per cent since Tom Brady won his seventh Super Bowl in 2021.
