Canada: Core Inflation Rises to 1.7% in August
Canada: Core Inflation Rises to 1.7% in August All items inflation edges up to 3.5% Core price inflation moves 0.2 percentage points to 1.7%
Canadian consumer price inflation was largely in line with expectations in August, rising to 3.5% from 3.4% in July. The rise came in spite of a 6.6% month-over-month fall in gas prices and continued declines in motor-vehicle prices. Rising food prices continued to add to inflation, with the 12-month increase moving up to 4.5% from 3.7% in July. Services costs, led by a considerable monthly increase in health and personal care, contributed significantly to the rise in the core rate of inflation, which moved up for the first time in four months to 1.7% from 1.5% previously. The rise in inflation was contained almost entirely in western Canada, with most of central and eastern Canada actually seeing lower rates in August than the month earlier.
Despite the attention that will inevitable be paid to the 3.5% headline increase (the highest in over five years), Canadian price growth reached a turning point in August. For the past several months the Canadian inflation story, much like that in the rest of the world, has been driven by rising energy costs, which have pushed headline inflation much higher than its core measure. This will no longer be the case over the remainder of this year. Energy prices have ebbed and notwithstanding the short-lived jump in oil prices yesterday, are unlikely to return to levels seen at the earlier part of this year. This shifting paradigm means that in the months ahead, more attention should be paid to the core rate of inflation, since it will be the best indicator of underlying price pressures in the Canadian economy.
On that front, the rise in core inflation to 1.7% leaves some cause for apprehension. Although still under the Bank of Canada’s target rate of 2.0%, the pick up in the core rate and other underlying measures take wind out of the case for cuts to Canadian interest rates. While we believe that slack built up in the Canadian economy will keep the core rate of inflation contained, the current rate of interest rates remains accommodative at 3.0% and is unlikely to see movement in either direction over the next year. Once the Canadian economy starts to show elements of sustained recovery in late 2009, the next move by the Bank of Canada will likely be to normalize rates to a level consistent with Canada’s improved economic growth.
TD Bank Financial Group
The information contained in this report has been prepared for the information of our customers by TD Bank Financial Group. The information has been drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does TD Bank Financial Group assume any responsibility or liability.
If you enjoyed this post, please consider to leave a comment or subscribe to the feed and get future articles delivered to your feed reader.
Comments
No comments yet.
Sorry, the comment form is closed at this time.