Canada: Inflation pressures easing - Nomura

Research Team at Nomura, notes that the Canada’s headline CPI fell 0.2% m-o-m in August, weaker than market expectations (a rise of 0.1%), resulting in a moderation in the year-on-year rate to 1.1%.

Key Quotes

“Core CPI inflation, excluding volatile elements and the impact of indirect taxes, was flat on the month, leading to a moderation y-o-y (1.8% y-o-y vs. 2.0% in July). Smaller y-o-y gains in food (+1.1% y-o-y) and recreation (+1.1% y-o-y) contributed the most to the deceleration in y-o-y price increases.

On a month-on-month basis, the main contributors to the slowdown in inflation were food (-0.6% m-o-m), transportation (-0.5% m-o-m), owing to lower motor vehicle prices, household operations (-0.5% m-o-m), owing to falling telephone service costs, and recreation (-0.5% m-o-m) owing to lower travel services prices.

On a year-on-year basis, upward pressure was again led by shelter (+1.7% y-o-y), driven primarily by increases in replacement costs (4.0% y-o-y) and property taxes (+3.0% y-o-y).

Another strong (positive) contributor to the y-o-y headline inflation figure was the household operations, furnishings and equipment category (+1.5% y-o-y), with significant gains in both household operations (+1.0% y-o-y) and household furnishings and equipment (+2.9% y-o-y).

Overall, we assess that special factors pertaining to just a handful of subcomponents seem to explain most of the deceleration in August (in addition to the continued drag by energy products). For example, the moderation in travel services is likely due to the arrival of a new low-cost air carrier, while the fall in telephone service costs could be a one-off. While the core measure did surprise to the downside, we think it may be too early to conclude that downward price pressures will develop as a cause of concern for the BoC just yet. However, with retail sales surprisingly weaker in July, the data do begin to put into question the efficacy of the recent fiscal stimulus, as households prefer to save the tax credit received rather than spend it; a risk we highlighted before.

The BoC remains concerned by the lack of momentum in the economy, especially on the exports side and the downward risk to inflation that it generates. Continued economic underperformance increases the risk that further stimulus may be needed. However, there are some reports that the federal government may use the Fall Economic Update (likely in November, but the date has yet to be announced) as a mini-budget and announce an acceleration in the fiscal stimulus and maybe new spending. This would allow the BoC to patient in deciding whether to take further action.”