Canada: Sticky core inflation argues for BOC to remain on hold – RBC

Dawn Desjardins, Deputy Chief Economist at RBC Economics, notes that the consumer prices edged down in Canada by 0.2% in July on the back of falling prices for gasoline, motor vehicles and women’s clothing.

Key Quotes

“Gasoline prices reversed course, falling 5.6% after rising for four months. The energy component remained a drag on annual inflation but we expect the downward pressure will fade as oil prices edge higher. Food prices rose in July pushing the annual rate to 1.6% from 1.3% in June though remaining well below 4.0% pace recorded earlier this year.

Core CPI was flat on a monthly basis and the annual rate stayed at 2.1% for the third month running. A seasonal decline in clothing and footwear prices was partially offset by an increase in travel services prices. Shelter prices rose as the homeowners’ replacement costs and home insurance posted increases. Com-pared to a year earlier, passenger vehicle prices posted a strong 5.4% gain while homeowners’ replacement costs were up 3.6%, in line with rising new home prices.

Our Take:

So far this year, Canada’s core inflation rate has only fallen be-low 2% for one month. The Bank of Canada attributes some of the rise in prices to the pass-through from the currency’s weak-ness and reasons that a stable currency sets up for this impact to lessen going forward. Of the myriad of factors at work on the headline rate, the Bank assigns a significant portion of the be-low-target performance to declining energy prices. Heading into the latter part of this year, the impact of these factors will re-verse lifting the headline rate but doing little to shift the core measure from 2%.

Given the close proximity of the merging of headline and core measures at the 2% target, we see little rea-son for the Bank to react to the volatility in the growth numbers related to the impact of the wildfires. Further, reducing interest rates would undo some of the necessary cooling in housing market activity that is occurring because of the pressure on affordability. Given these factors, we expect the Bank to hold the overnight rate 0.50% not only through the remainder of this year but through 2017 as well.”