Canadian Inflation Not a Problem

May 20, 2008


Canadian April CPI figures, due at 11:00 GMT on Wednesday (07:00 EDT), are expected to replicate the benign and sub-target 1.4% posted in the year to March. Trend has been even lower. During 1Q08, that is between December and March, Canadian consumer prices increased merely 0.7% at a seasonally adjusted annual rate, which was well below the comparable 3.1% U.S. pace. And over the last six reported months, Canadian inflation was 1.4% saar versus U.S. inflation in the six months to March of 4.6% saar. In Canada, food prices rose just 0.4% in the twelve months to March. The PPI fell 0.3% in the year to March and shed light on the main reason why inflation is trending lower in Canada but upward most everywhere else. C-dollar appreciation subtracted four percentage points of PPI inflation in the year to March, more than offsetting the upward impetus of 2.8 percentage points from oil.The lack of inflation and downside growth risks enabled the Bank of Canada to cut its target overnight rate by 150 basis points from 4.5% at the start of December to 3.0% since April 22nd. Another reduction of 25 bps is likely on June 10th, the next scheduled interest rate policy announcement date. Wholesale sales decreased 0.8% in the first quarter after a drop of 0.3% in the fourth quarter and posted a 0.4% drop from 1Q07. Motor vehicle commerce had been especially hard-hit. In the eight months through March, manufacturing sales declined 5.6% but just 1.9% not including autos, while factory orders slumped by 4.7%. The Canadian current account, however, appears likely to register substantial improvement in 1Q, swinging from a deficit equal to 0.1% of GDP in 4Q07 to a surplus that I expect to run about 0.75% of GDP in 1Q08. That would be similar to the full-2007 ratio of 0.9% of GDP but considerably smaller than such had been in previous recent years.






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