Monday Market Minute | Aug 22, 2022

Inflation dips from peak but remains stubbornly elevated — the BoC's work is far from over

What Moved

StatsCan's July CPI data showed a modest deceleration to 7.6% from the June peak of 8.1%, driven primarily by falling gasoline prices. However, core inflation measures — CPI-trim and CPI-median — remained near their highs, and food price inflation actually accelerated. The BoC acknowledged the slight moderation but was clear: a few tenths of relief did not change the trajectory. Markets continued to price in another significant hike in September, with the terminal rate expected to reach 4% or higher.

Why It Matters

The slight inflation deceleration tempted some to call the peak, but for private markets investors, the distinction between "peaked" and "resolved" mattered enormously. Inflation at 7.6% was still nearly four times the BoC's target, meaning real returns remained deeply negative on most traditional investments. The private credit yield advantage — now delivering 9-12% nominal on quality portfolios — continued to widen relative to public bonds and GICs. The investment case for floating-rate alternatives remained intact.

Signal to Watch

Wage growth data — if compensation increases embedded inflation expectations into the labour market, the BoC would be forced to maintain higher rates for longer, extending private credit's structural advantage.

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