Summary
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There has been a decoupling between headline and core inflation. At 0.1%, the former is currently accelerating at its lowest rate in 15 years.
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Core CPI inflation, instead, has remained firm at 2% since the beginning of the year despite an economy in recession.
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Excess capacity in the economy as whole is not a sufficient condition for service price inflation to decelerate. In times of economic weakness or contraction, the goods sector is the one usually hardest hit.
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Thirteen of nineteen CPI components are registering higher rates of inflation than a year ago. Those where inflation is decelerating fall into two major industry groups: transportation and shelter.
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The market may begin to price a Bank of Canada move much sooner than suggested by the BoC in its conditional pledge to keep rates at current levels through June 2010.
