The Bank of Canada has historically stressed the output gap as
an indicator of downward pressure on inflation ahead, noted CIBC.

Instead, research by the economics team at the bank has made the case that given frequent reassessments of both real gross domestic product and potential GDP, labor market measures of economic slack provide a better real-time indicator than the GDP-based output gap.

Perhaps that's starting to catch on with policymakers, as a recent
speech by Deputy Governor Rhys Mendes used the unemployed/
vacancy ratio in an analysis of the sensitivity of inflation to economic slack, stated CIBC. That indicator also performed well in the bank's analysis of the drivers of United States wage inflation.

The numerator in that indicator, the number of unemployed Canadians, has been moving steadily higher as a share of the workforce, and there may be others who are being left out of that count since they've stopped looking, wrote the bank in a note to clients. However, the denominator, job vacancies, has also been contributing to the trend toward more slack.

There was a plethora of vacant jobs as the economy opened up after COVID-19 pandemic restrictions, when in late 2021 and 2022 it seemed like every restaurant, airport, and trucking company had a help-wanted sign.

Those days are now well behind Canada, pointed out CIBC. The headline job vacancy rate has essentially normalized, with the share of positions waiting to be filled now below pre-pandemic levels in cyclical industries. Vacancies are now concentrated in non-cyclical sectors, including fields like health care where there is simply a chronic shortage of those with the right skill set.

The upshot is that the bank's preferred measure of job market slack
-- the number of unemployed persons per job vacancy -- has
steadily increased, and sits above where it stood in 2018-19, a period in which inflation was calm and overnight rates were
below 2%. Strip out health care, and it's now chronic shortage of workers, and the ratio of unemployed to vacant jobs sits at its highest level since 2016, again ignoring the deep economic
chasm of the pandemic.

That economic slack should translate into further downward
pressure on core inflation measures, particularly those that
strip out mortgage interest costs, according to CIBC. In turn, that provides plenty of fuel for further Bank of Canada rate cuts in 2025.

Indeed, barring a turn to large-scale fiscal stimulus, Canada's central bank will likely have to drive the overnight rate into at least mildly stimulative territory, and like CIBC, it will be eyeing these measures of labor market slack to determine when its work is done.