Canada Experiencing Higher Inflation But Softer Growth

June 30, 2011

May consumer price data released yesterday revealed an acceleration of inflation to a 12-month increase of 3.7%, up from 3.3% in April and the most since March of 2003.  The annualized increase of the seasonally adjusted total consumer price series between December and May was also 3.7%.  A 2.4% December 2010 versus December 2009 increase had been the first endyear to endyear increase to exceed the 2.0% target since 2007.  Core inflation remains under target at 1.8% but higher than Bank of Canada officials had been recently assuming.  Their Monetary Policy Report released in April projected on-year total and core CPI for the second quarter of this year of 2.7% and 1.4%.  The main inflationary impetus has come from energy, up 16.6% on year in May versus a 2.4% advance in all other consumer prices.  However, non-energy prices rose 0.5% on month in May.  Central bank officials had been forecasting core inflation not returning to 2.0% until the second quarter of next year.

Canadian GDP growth meanwhile slowed abruptly in the second quarter and apparently by more than monetary officials had anticipated.  They were predicting 2.0% growth in the second quarter followed by 2.7% in each of the remaining quarters of the year.  Real GDP on a national income accounts basis had advanced at annualized rates of 3.1% in the fourth quarter of 2010 and 3.9% in 1Q11.  But monthly GDP calculated on a supply-side industry by industry basis shows no growth at all in April and annualized growth in the three months between January and April of just 1.3%.  Between those months, factory output fell 1.1% annualized, and service sector production edged just 0.1% higher mainly because of a 5.1% plunge in wholesale turnover. 

The conflicting surprises in growth and inflation will give Bank of Canada authorities some food for thought at their July policy meeting.  Policy has been on hold since a 25-basis point hike of the overnight target rate to 1.0% in September 2010.  The U.S. dollar has traded exclusively below par against its Canadian counterpart since February 2.  The greenback is currently quoted at CAD 0.9644, 1.3% below its first-half mean of CAD 0.9767.  The year’s strongest Canadian dollar level of CAD 0.9443 was set on May 2.

Copyright Larry Greenberg 2011.  All rights reserved.  No secondary distribution without express permission.

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