The 2-handle

And there she be. The two-handle. Yahoo. Does this mean Tiff wins?

The country’s inflation rate plunged to 2.9% last month. That’s a big deal. It represents a significant half-point plunge from December, and was seriously below the consensus forecast. It’s the lowest monthly number since last summer, which prompted the Bank of Canada to hit the brakes and pause its aggressive tightening cycle. Now, maybe, the next shoe will soon drop (but not in March).

So, prices are not dropping (that would be deflation). But price growth is shrinking (that’s disinflation). Inflation in five of the eight categories measured is lower – including a meaningful plop for groceries. Seasonally-adjusted, prices in January were down for the first time since the Spring of 2020. Yes, the Before Times. Pre-Covid, when you hadn’t yet heard of Tamara Lich, when some crazy guy was US president, when people still actually went to work and drove cars with gas in them, when house prices were moderating and Peterbilts were trucks, not political weapons.

This matters because the Bank of Canada’s target range for inflation is 1-3%. The Holy Grail is 2%. And now we’ve travelled from a post-pandemic high of 8.1% down to 2.9%, which is close enough. It took ten rate hikes to cool the economy, dampen loan demand, shutter the housing market, scare the poop out of mortgage renewers and cost 45,000 real estate agents their jobs in just one market, but here we are. The two-handle.

And look what the news did this morning  to the yield on those benchmark 5-year Canada bonds. Tobaggans.

Bond yield reacts to withering inflation

It’s just one month of encouraging data, but coming after December’s weirdly-hot reading, it confirms a trend the CB wants. Core inflation is looking a lot better. Down-drivers were airfares, clothing and food, while shelter costs (rent, mortgage interest) ticked higher.

“There is little debate on this one—it’s a much milder reading than expected, especially given the high-side surprise seen in last week’s round of U.S. inflation reports, a nice contrast,” says BMO Economics. “Importantly, January can set the tone for inflation, since firms often take the opportunity to adjust prices for the year in this month—and there was little sign of a big January bump this year.”

So what does it mean for interest rates? For Tiff Macklem’s next big move?

Well, the fight ain’t over yet. There have been serious wage gains over recent months, adding to business overhead. Real estate has been heating up again. The cost of a leased apartment is nuts. The rutting season mortgage-rate sale at big lenders has not really started yet. Core inflation is still bumping on 3%. So the CB will want to see a few more months of data.

No rate cut March 6th. Still a faint hope for April 10th. But big odds for the summer.

Says BMO: “Clearly today’s result makes rate cuts much more plausible in coming months, and we remain comfortable with our call that the Bank will begin trimming in June.”

The pointy heads at TD seem to agree.

“With various discretionary items showing signs of larger-than normal seasonal discounting, the weak consumer demand that has prevailed in Canada for some time may finally be starting to show up in prices,” says the green bank. “Shelter inflation remains a thorn in the BoC’s side… the biggest hurdle preventing the Bank from cutting interest rates.”

“We expect that price pressures will continue to come off the boil in the coming months, and that the Bank will be ready to cut rates come the spring.”

We may not be there yet, but we’re closer.

That soft landing we’ve yakked about for a while grows more plausible. Inflation turns into disinflation. Monetary policy becomes more accommodating (rates fall). The economy cools but doesn’t chill. Wages gains continue. Unemployment creeps higher, without spiking. No recession – at least not one most people would notice. No reset. No crash. No locusts.

And then, suddenly, it’s spring.

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