Canada’s inflation Preview: Inflation data unalter the outlook for ongoing policy tightening towards neutral

• With the oil price drop, Canada’s headline inflation is expected to remain stable at 1.7% over the year in December while core inflation is set to remain at 1.5% y/y.
• Even with inflation decelerating beyond market expectations, the Bank of Canada won’t be surprised given its stance in January monetary policy meeting.  

Canada’s inflation is expected to remain stable at 1.7% over the year in December, missing the official inflation target of 2% at the end of the year. The monetary policy stance of the Bank of Canada is expected to remain unaltered by the fresh release of inflation data by the Statistics Canada on Friday, January 18 as the oil price drop is widely expected to have a deflationary effect

The core inflation stripping the consumer basket off food and energy prices is expected to remain at 1.5% y/y in December, unchanged from November and decelerating from 1.7% y/y in August last year.

In the oil-rich Canada, the massive oil price drop is having a significant impact on the economy. The oil price dropped some 38% during the final quarter of 2018 before recovering slightly in January.  The headline inflation is therefore affected by decelerating below the 2% inflation target of the Bank of Canada.

“Inflation is projected to edge further down and be below 2% through much of 2019, owing mainly to lower gasoline prices,” the Bank of Canada wrote in its last monetary policy decision on January 9.

On the other hand, the Bank of Canada is expecting depreciation of the Canadian Dollar to have pro-inflationary impulse largely negating the oil price development. 

“Lower level of the Canadian dollar will exert some upward pressure on inflation. As these transitory effects unwind and excess capacity is absorbed, inflation will return to around the 2% target by late 2019,” the Bank of Canada further stated.

The outlook for monetary policy is set to remain unaltered with the Bank of Canada still expecting to further tighten its policy towards the neutral level of 2.5%-3.5% where monetary policy is neither stimulative nor accommodative.