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Statistics Canada's overdue re-weighting of its consumer price
index (CPI) basket, set for release with June data, could give
another bump to inflation which is already running hot. It also
has implications for real return bonds, which compensate
investors for changes in CPI.
"It's something that people are paying attention to ... because
of how odd the period preceding it was," said Royce Mendes,
senior economist at CIBC Capital Markets.
"If it puts more weight on something that generally has a higher
inflation rate, and takes away some of the weighting on things
that just generally over many years have lower inflation, you
are going to see the monthly numbers perk up," he said.
Statscan rejigs the weights of its CPI basket on a semi-annual
basis, with the 2021 update delayed by six months due to the
COVID-19 pandemic.
For the first time, the agency is using real world inputs - like
price scanners at grocery stores - and actual consumer outlays,
along with its traditional survey of household spending, to
determine the new weightings.
The Bank of Canada targets inflation at 2%, with a 1%-3% control
range. The central bank has said it expects inflation to be near
the top end of its target band over the next few months due to
the base-year effect, before dropping to around 2% later in
2021.
In April, inflation rose at its fastest pace in a decade to
3.4%, mostly due to the statistical comparison to last year when
prices tanked during early pandemic shutdowns.
Statcan's alternate index, weighted to better reflect the impact
of spending shifts due to the pandemic, has consistently tracked
above official inflation. Canadians spent less on gasoline and
travel in 2020, for example, but more on food and housing.
Key to the rejig is a bet on just how much the pandemic shift in
consumption habits will stick as vaccines roll out and Canadians
return to a more normal life.
"For all we know we could go back to the same spending patterns
we had before the pandemic," said Derek Holt, head of Capital
Markets Economics at Scotiabank. "I don't think so - I don't
think we'll all be boarding cruise ships and packing movie
theaters anytime soon, but maybe we will."
For bond investors, the tricky thing will be judging how a
basket shakeup will change headline numbers, either up or down,
particularly as some of the components that could be reduced in
weight face sharp price rises as the economy reopens.
"Air fare inflation is going to be pretty high for the next
year," said Stephen Brown, senior Canada economist at Capital
Economics. "So if they reduce the weight of airlines they'd
actually be reducing headline inflation by doing that."
(Reporting by Julie Gordon in Ottawa and Fergal Smith in
Toronto; Editing by David Gregorio)
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