Summary
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Despite the recession, inflation is remarkably buoyant in Canada. In March, the Bank of Canada core CPI stood at 2%, dead on the monetary authority’s target midpoint.
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While core inflation in the goods sector has remained stable since 2005 in the United States, this measure of inflation in Canada has registered a sharp turnaround since last summer.
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The loonie’s unprecedented depreciation during a U.S. recession administered a virtual electroshock to import prices. While the United States has recorded an imported goods deflation, import prices in Canada have exploded by more than 20%.
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In future, however, there should be no inflationary threat whatsoever to Canada for two reasons. First, the effect of the exchange rate depreciation on import prices should begin to wane gradually. Second, the Canadian economy should soon enter a territory of considerable excess production capacity. On the assumption that economic growth will drop to -5% in Q1, the output gap should approach the -3% mark (i.e., 3% excess supply).
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Canadian disinflation as measured by the core CPI (CPIX) is taking longer to set in on account of the loonie’s record decline. Despite its recent perkiness, inflation in Canada is nevertheless expected to moderate. In this regard, the CPIX’s annualized growth in the past three months was only 0.4% on a seasonally adjusted basis.
