Inflation data from Canada released on Wednesday, showed larger-than-expected numbers. According to analysts at the National Bank of Canada, price pressures are mounting in Canada but they think is a transitory phenomenon.
Key Quotes:
“Canada’s consumer price index rose 0.5% in May (not seasonally adjusted), one tick above consensus expectations.”
“Although less acute than south of the border, price pressures are also mounting in this country. While annual figures continue to be upwardly impacted by positive base effects, recent momentum also raises eyebrows. Headline CPI is running at a hot 4.4% annualized rate over the past 3-months.”
“In light of this strong recent momentum, one could ask if there could be persistence in price pressures or if this is rather a transitory phenomenon. We are part of the former camp. In the short-term, the reopening of industries negatively impacted by COVID-19 alongside extraordinary income support programs that are still in place could create artificial labor shortages contributing to sticky inflation. As a reminder, households have accumulated a sizable 10% of GDP in excess savings in the last 5 quarters which could lead to a spending bonanza while supply constraints are still at play.”
“In the long-term, we continue to see this cycle as much more conducive to above-target inflation. Both monetary and fiscal policy are expected to stay very stimulative for some time and protectionism/deglobalization as well as the ecological transition are suggesting a regime change for inflation. In sum, we are still seeing underlying inflation in the upper band of the central bank target range in 2021 and 2022.”
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