Canada: CPI remains below target - ING

According to James Knightley, Chief International Economist at ING, Canada’s CPI release on Friday of 1.2% YoY, despite being well below the 2% target, is unlikely to stop any upcoming BoC hikes as influencing factors are believed to be ‘temporary’.

Key Quotes

“The all-items CPI index increased in line with expectations at 1.2% YoY in July, following a 1% YoY increase in June, the first rise since January. However, the CPI index still disappointed analysts’ forecasts, which expected a 0.1% MoM gain, with data showing that there was no change from the June period. Core prices fell 0.1% MoM and YoY remained unchanged. Nonetheless, two of the three main measures of consumer price inflation increased, including the CPI median and trim.”

“Following 12 months where prices were up in six out of the eight tracked areas, the allitems CPI growth (YoY) was mainly driven by the transportation and shelter indexes. The two decreasing indexes were the household operation, furnishings and equipment index and the clothing and footwear index. Consumer food prices maintained their June YoY gain of 0.6%.”

“The continued low inflation is likely to weaken the CAD in the short term, with the depreciation of the CAD already beginning after Friday’s figures. The BoC are still convinced that this stagnant inflation is a result of ‘temporary’ factors including increased food competition, electricity rebates and car prices. Moreover, the YoY increase, albeit small, could be seen as a turning point after 6 months of it declining. Therefore we think that the BoC are likely to continue tightening policy, with the next rate hike possibly being in October.”