To cut, or not to cut? That is the question.

Welcome back to The Peak’s Inflation Drinking Game. The first rule, take a sip (of your coffee, of course) every time you read any variation of the phrase “rate cuts.”  

What happened: U.S. inflation growth cooled once again in January, falling to 3.1% from 3.4% in December. That sounds peachy keen, but analysts expected growth to drop below 3%. What’s more, closely watched core inflation also came in higher than expected. 

  • Markets reacted to this news like a Danish prince finding out his uncle killed his dad, which is to say, poorly. Canada’s main stock index had its biggest drop in 17 months

Why it matters: With inflation weakened but still sticking around like a dry cough, the U.S. Federal Reserve has more wiggle room to keep interest rates elevated for longer in service of bringing inflation down further. That is not the news investors wanted to hear. 

  • A recent boost in North American markets was buoyed by gung-ho investors who were betting that rate cuts — which free up consumer dollars — were on the horizon.  
  • While economists still predict cuts for this year, sticky inflation and bulky GDP growth mean investors will have to wait until June or July for rate cuts, not March or May. 

In Canada: It’s a similar story for the Bank of Canada. While the Canadian economy has been nowhere near as robust as America’s, the BoC is still wary of premature cuts. Better-than-expected job gains and a fall in unemployment in December also undermined the urgency for cuts.  

Bottom line: Canada’s January inflation numbers drop Tuesday and will give us a clearer picture of when cuts might be coming and how strong they may be. Right now, analysts are split. TD, for example, predicts June or July, while Scotiabank thinks by September.—QH