An “unprecedented intellectual impossibility”: Canadian inflation weaker than it appears

National Bank points out a glaring inconsistency in this week’s Canadian inflation report: Every component rose less than the headline.

How can the sum be more than the parts? They explain that it’s a quirk from the way Statistics Canada seasonally adjusts the data but that it argues inflation is near-flat rather than above target.

“As today’s Hot Chart shows, in December, every seasonally adjusted sub‑component grew at a
slower pace than the overall index—an unprecedented intellectual impossibility,” National Bank writes.

CPI canada

Here is the note:

When the CPI was released on Monday, the market reaction was mixed in the face of puzzling results. On the one hand, headline
annual inflation came in well above consensus expectations (2.4% vs. 2.2% expected). On the other hand, the two core inflation
measures tracked by Bloomberg pointed to more contained price pressures: CPI-Trim matched expectations at 2.7%, while
CPI‑Median came in two‑tenths below consensus (2.5% vs. 2.7%). Part of these discrepancies stem from differences in the
seasonal‑adjustment process. For CPI‑Trim and CPI‑Median, Statistics Canada seasonally adjusts each sub‑component and then
aggregates them using the appropriate weights. In contrast, for headline CPI, the agency seasonally adjusts only the main
components but does not use these results when constructing the overall index, which is instead seasonally adjusted independently.
Statistics Canada justifies this approach by arguing that it filters out seasonal patterns more effectively, but we note that it can also
create frustrating inconsistencies. As today’s Hot Chart shows, in December, every seasonally adjusted sub‑component grew at a
slower pace than the overall index—an unprecedented intellectual impossibility. Had Statistics Canada used a bottom‑up approach
similar to that of the U.S. Bureau of Labor Statistics, seasonally adjusted monthly inflation would have been just 0.06%, instead of
the official 0.30%. The last time such a large gap between the two methods appeared was in 2009. While the Bank of Canada
officially prioritizes CPI‑Trim and CPI‑Median as core measures, its recent communications indicate it is also monitoring inflation
excluding food and energy, as well as CPI excluding the 8 most volatile components. The first two, which rely on the bottom‑up
method, rose only 0.07% on average in December (0.8% annualized), while the latter two, which are seasonally adjusted
independently, grew 0.19% on average (2.3% annualized). At a time when the Bank of Canada is reassessing which core inflation
metrics to emphasize, it would be appropriate for both the Bank and Statistics Canada to align on a consistent seasonal‑adjustment
methodology. Maintaining the status quo makes it unnecessarily difficult to assess underlying inflation pressures.

If Canadian inflation resolves lower, it could weigh on the Canadian dollar as the chance of a December rate hike (currently at just shy of 50%) is priced out.

This article was written by Adam Button at investinglive.com.