CANADA — Canadian inflation showed further signs of stabilization in July after having trended lower since the start of the year. The annual increase in most core measures edged higher and the all items index rose as expected following five months of below-consensus readings, reported RBC Capital Markets.
There is still a ways to go, however, with headline inflation near the bottom of the Bank of Canada’s 1-3 percent target range and most core indices around 1.5 percent. Some temporary factors are at play—the central bank has attributed part of the recent decline to lower energy prices and less auto price inflation. The former was once again a factor in July amid another round of electricity price rebates in Ontario. “Nonetheless, our diffusion index shows less than 40 percent of the CPI basket is growing at 2 percent year-over-year, indicating below-target inflation doesn’t simply reflect a few items,” stated Josh Nye, RBC economist.
He added, “While it is encouraging to see the recent downward trend in the annual rate coming to an end, today’s data doesn’t really change the narrative on inflation. When they meet next month, the BoC’s Governing Council will once again be weighing sub-target inflation against further strengthening in activity (we expect Q2 GDP +3.7 percent vs. the BoC’s 3 percent forecast from July) and robust job growth.”
Faced with that same tradeoff in July, policymakers opted to raise the overnight rate, anticipating that tighter economic conditions will eventually put upward pressure on prices, the RBC found.
Said Nye, “They are likely to maintain that view, particularly as stronger Q2 GDP growth points to remaining economic slack being absorbed sooner than expected. But until there are clear signs of inflationary pressure emerging, we think the central bank will be fairly cautious in removing accommodation. A September rate hike can’t be totally ruled out, but we think a move in October is more likely when the bank refreshes their economic projections.”
Source: RBC Capital Markets press release