Subdued Canadian Inflation

September 21, 2010

Canadian CPI inflation slid a tenth to 1.7% last month and has been lower than the 2.0% target since December 2008.  Between August 2009 and August 2010, energy prices advanced 5.0% and all other consumer prices went up 1.4%.  Core inflation stood at 1.6% in August, same as in July, but the core index only rose 0.8% at a seasonally adjusted annual rate over the past three reported months.  That was less than a 1.4% annualized increase recorded by all consumer prices between May and August.  Canada still has significant excess product supplies.  Bank of Canada officials therefore do not project a return of core inflation to 2.0% until the first quarter of 2012.  The total CPI excluding the effect of indirect tax changes is likewise not expected to reach 2.0% until early 2012.  Producer price inflation stood at 1.0% in July but just 0.3% excluding oil.  Appreciation in the Canadian dollar cut PPI inflation by 1.8 percentage points over the past year, easily offsetting the boost from higher oil prices.

The Bank of Canada enacted a third 25-basis point increase in its target overnight interest rate to 1.0% on September 8, following rises on June 1 and July 20.  In spite of those moves, officials called Canadian financial conditions “exceptionally stimulative” as such should be if the 2% inflation target is to be achieved in the medium term of what remains an unusually uncertain outlook.  The Fed has not yet made its initial rate hike and retains a 0-0.25% target range and may not be in position to do so until well into 2011, if then.  U.S. on-year total CPI inflation of 1.1% and core inflation of 0.9% are below the Canadian pace.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.



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