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Economy in Brief

Canada's Inflation Takes Hold If Not Flight
by Robert Brusca  April 19, 2011

Canada offers various measures of inflation but they all agree that the rate of inflation is on the rise. Inflation accelerated across most categories in February and did it again in March. Yet inflation is not broadly higher over three-months compared to six months. During that period core inflation did rise, elevating itself to 2.5% over three months from 2.1% over six months while headline inflation actually settled back at a rise of 4.5% compared to 4.9% over six months. Inflation did not accelerate across most categories on a three-month to six-month comparison. Canada's CPI X that trims eight volatile items from the index is pounding higher at an even faster pace, albeit not as strong over 12-months as the core and headline increases. If the CPIx is the arbiter of trends it is showing a new virulence to inflation over the past three-months. Having lower inflation Yr/Yr is not much of a comfort if it means inflation is surging even faster over three-months.

While the Bank of Canada had been looking for inflation to reach 3% by June the headline is well past that pace with the three-month pace of core inflation coming up to a 2.5% annual rate over three-months. Still the central bank has kept its Keynesian position that economic slack would keep prices from continuing to escalate and that inflation would settle down closer to the 2% mark by mid-2012. One wonders if the Bank is still so sanguine?

At some point when inflation overshoots your intermediate goal or target you have to recalibrate your forecast and when you are the central bank that could mean re-calibrating your policy as well. This inflation result would seem to pressure the Bank of Canada to move. Still, the UK has seen a greater overshooting than this and has stood on the sidelines. But the upshot of that policy may not be what the Bank of Canada would want to emulate. Moreover the UK has an austerity programs in place along with plunging money supply measures. Canada's economy has been a bit firmer even admitting that the monthly LEI has just taken a spill.

On one hand Canada is a natural resource producing country and commodity prices are flying; that should imply upward pressure on the Canadian aggregate price level. On the other hand Canada trades extensively with the US and core inflation in the US has been surprisingly well contained despite all the pressure in commodity prices. This connection should exert some discipline on Canadian inflation but would that be enough?

At the end of the day the Bank of Canada will have to take sides on these issues and choose. To me the inflation pressures seem clear and widespread enough to be a worry and Yr/Yr price increases substantial enough to warrant action. Procrastination does seem to offer much of a payoff at this point.

Canada's CPI and Core Inflation
  % Mo/Mo % SAAR
  Mar-11 Feb-11 Jan-11 3-MO 6-MO 12-MO Yr Ago
Al Items 0.8% 0.0% 0.3% 4.5% 4.9% 3.2% 1.4%
 CPI Core 0.3% 0.2% 0.2% 2.5% 2.1% 2.0% 1.0%
All items Excl 8 Volatile(CPIx) 0.7% 0.2% 0.0% 3.5% 2.1% 1.7% 1.7%
RPIxseas food -0.3% 0.6% 0.2% 2.2% 3.9% 4.1% 4.3%
Food & Non Alcohol Bev 1.6% 0.2% 0.4% 9.3% 5.2% 3.3% 1.2%
Shelter 0.1% 0.0% -0.1% 0.0% 1.1% 2.4% -0.7%
Clothing&Footwear 2.1% 0.0% -1.2% 3.5% 3.6% 0.3% -2.2%
Education 0.4% 0.3% 0.2% 3.9% 3.9% 3.7% 4.2%
Health&Personal Care 0.3% 0.3% -0.1% 2.4% 1.7% 2.5% 2.7%
Transportation 0.4% 0.1% 0.2% 2.8% 4.6% 3.1% 1.5%
A RED highlight indicates inflation accelerating from pace of previous horizon
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