17 May 2007

 

 

 

Headline inflation, as measured by the All-items consumer price index (CPI), rose 2.2% in April 2007 compared to a year earlier, a slightly slower growth rate than the 2.3% increase recorded in March. …

 

The Bank of Canada's closely watched core measure of inflation (which excludes the 8 most volatile components of the CPI as well as the effect of changes in indirect taxes) rose 2.5% between April 2007 and April 2006, compared with 2.3% the previous month.   This was the strongest rise posted by this index since March 2003. Core inflation is now well above the Bank's 2.0% inflation-control target. Moreover, upward pressure on core inflation was broadly based….

 

The bottom line: There is no question that core inflation remains too hot for the Bank of Canada's comfort. The Bank had recently revised its forecast for core inflation to 2.2% for the second quarter. This now appears to be in doubt. Moreover, in its press release that accompanied its rate decision announcement on April 24, Canada's central bank stated that it "continues to judge that the risks to its inflation projection are roughly balanced, although there is now a slight tilt to the upside." After today's report, the risks for inflation are squarely tilted to the upside. I believe rate hikes are on the horizon but no change is expected on May 29, the next rate decision date. 

 

Today's report was bullish for the Canadian dollar. The loonie is now up about 6.6% in the past two months and the rise has been credited to a combination of strong domestic data, higher commodity prices, a weaker U.S. dollar, and merger-related interest in Canadian companies. For the time being, the stronger Canadian dollar will do some of the tightening for the Bank of Canada.