Lingering Worries in Latest Canadian August CPI Data

September 23, 2008

Although total consumer prices in Canada dipped 0.2%, the first drop in seven months, the drop was not a surprise because gasoline prices slumped 6.6%.  Other elements of today’s release will keep make Bank of Canada officials reluctant to cut interest rates just yet.  Targeted core CPI rose 0.3% versus an expected 0.1% uptick and by 1.7% from August 2007, ending four straight months when the 12-month advance had been 1.5%.  On a seasonally adjusted annualized basis, total consumer prices advanced 5.5% in the three months to August and by 5.3% saar in the six months to August.  Food prices advanced 4.5% in the year to August, up from 3.7% y/y in July and 1.9% y/y in May.  Non-energy price inflation edged two-tenths higher to 1.8%.  Total consumer prices rose 3.5% year-over-year, up from 3.4% in July, 3.1% in June, 2.2% in May, 1.7% in April, and 1.4% in March.  The consumer prices for goods and for services each climbed by 3.5% during the last twelve months, compared to a central bank target of 2.0%. Inflation had not been as elevated as 3.5% since March 2003, when the target interest rate was at 3.0%, same as now.

When Bank of Canada policymakers early this month voted to keep their interest rate target unchanged, they warned of a greater risk of “a more pronounced interplay between weakness in the U.S. economy and tightness in credit conditions that could affect the U.S. outlook for 2009.”  Banking crisis news since subsequently turned much worse, but oil prices have moved well above recent lows.  As contained in the fifth paragraph of that latest statement from the Bank of Canada, total and core inflation are expected to converge on the 2% target in 2H09.  Meanwhile, retail sales in July experienced a disappointing and smaller-than-projected volume rise of just 0.1%, but wholesale turnover for the same month had been surprisingly buoyant with increases of 2.3% from June and 5.8% from July 2007.  The Canadian economy has been through a rough patch with successive real GDP growth of 0.8% at a seasonally adjusted annual rate in 4Q07 followed by -0.8% saar in 1Q08 and +0.3% saar in 2Q08.  Like many other central banks, Canada is caught between excessively slow growth and above-target inflation.  The path of least resistance is to keep policy steady, pending clarification of the outlook.



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