Canada: Lower core inflation
Total CPI : Latest (y/y) : +2.2 (actual) +2.3% (forecast)
previous :+2.3%
CPIX : Latest (y/y): +0.9% (actual) +1.1% (forecast)
Previous :+1.4%
FACTS: Headline CPI inflation decreased to 2.2% in February from 2.3% in January. Core CPI declined strongly, decreasing to 0.9% year-over-year from 1.4% one month earlier. On a monthly basis, headline CPI rose 0.3%, the same increase observed one month earlier. Core prices were up 0.2% after remaining unchanged in January. On a seasonally adjusted basis, headline CPI remained unchanged and core prices decreased 0.1%. In February, 6 out of 8 major components were up on the month (s.a.). Recreation, education and reading (+0.3%) posted the strongest advance while clothing and footwear (-0.1%) and Alcoholic beverages (-0.1%) declined. On a regional basis, Nova Scotia (+3.4%) posted the highest inflation numbers (y/y) while Alberta experienced the lowest rate (+1.2%).
OPINION: Even if February’s core inflation rate was lower than expected, there has not been a significant shift in the underlying inflation trend in services and core goods in recent months (middle chart). In our opinion, the current level of the overnight rate remains overly accommodative given the strength of the domestic economy. Furthermore, our simulations for the inflation path for the next four months shows that while core inflation is likely to remain tame, headline inflation is heading toward 3%. If Canadian labour markets continue to improve, the possibility of passthrough to the core rate will increase. Having said this, we must recognize that the February CPI report provides more leeway for the BoC to assess the impact on the Canadian economy of international geopolitical risks and the fallout from Japan’s catastrophe on the global supply chain. In light of current developments, the odds that the Bank of Canada will keep its current policy stance unchanged somewhat longer than we had previously assumed have increased. This morning, we are pushing back our first BoC rate hike from May 31 to July 19, 2011.
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