Canada: Inflation heads north in January - Nomura

Research Team at Nomura notes that the Canada’s headline inflation for January came in stronger than expected (2.1% y-o-y vs. 1.6% y-o-y by consensus).

Key Quotes

“In terms of composition, the transportation (+6.3% y-o-y) and shelter (+2.4%y-o-y) price indices contributed the most to the y-o-y increase. The food price index continued to decline on a y-o-y basis (-2.1%- y-o-y) for the fourth consecutive month, providing some negative pressures to the overall basket. On the flip side, the new core inflation measures remained relatively stable on the month, with CPI-common and CPI-Median inflation inching lower to 1.3% (vs. 1.4% previously) and 1.9% (vs. 2.0% previously), respectively, while the CPI-trim rose marginally to 1.7% vs. 1.6% in December. As we expected, base effects in energy prices are exerting positive pressure on the subcomponents (e.g. gasoline prices (+20.6% y-o-y) posted their largest increase since September 2011).”

“On a month-on-month basis seven out of the eight main categories posted gains. The main positive contributor to inflation was the transportation price index (+2.8% m-o-m), whereas clothing and footwear costs declined (-0.9% m-o-m).”

“Similarly, on a year-on-year basis, all categories except food prices posted gains in January. Transportation (+6.3% y-o-y) and shelter (+2.4% y-o-y) contributed the most to the gains, whereas food prices (-2.1% y-o-y) exerted a drag on overall headline prices.”

“Overall, the increase in headline inflation is owing to the energy base effect and an increase in transportation costs on the month. The relative stability in the core measures suggests that underlying inflation could be basing, but the level of excess supply remains important, preventing an increase in inflationary pressures. This report does not change our view that the BoC is unlikely to change its policy rate this year and the Bank’s focus should remain on any possible impact on the economic outlook from changes to US trade policy. More specifically, the recent economic data have improved somewhat, except for retail sales which declined after three consecutive months of strong gains, which could indicate that the household base was not as resilient as generally expected. At the margin, the inflation data for January should prove supportive for our view on USDCAD (we are targeting 1.28 by the end of Q1).”