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Has Low Inflation Left Canada?

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The Bank of Canada characterized Canada’s inflation as remaining low according to the announcement in April. Since that time, total CPI has moved to 2.0%, core CPI growth has outpaced estimates and oil prices have marched to $104. Canada’s inflation backdrop no longer seems relatively low and hence there is less scope for a dovish tone at coming announcements that eliminates the already lean chance of a rate cut.

Granted, the energy price driven spike in total CPI through April was anticipated. The total CPI surge to 2.0% in April was well in advance of the return to 2.0% in Q1 of 2015 anticipated by the BoC. Moreover, total CPI is on track for a 2.0% clip in Q2 of this year, which would overshoot the BoC’s 1.6% estimate.

The Bank’s core CPI measure edged higher to a 1.4% y/y clip in April from a 1.3% rate in March. Core inflation, while still quite lean historically, has now marched higher from the 1.2% pace in February. Looking ahead, core CPI on track for a 1.4% pace in Q2, which would outpace the Bank’s 1.2% estimate.

Overall, the shift away from a low inflation backdrop may prompt a change in the Bank’s language next week at their June 4, 2014 monetary policy meeting that leaves a less dovish tone to announcement. Of course, softness in exports and sluggish investment growth may fill the void, leaving an assessment of the balance of risks that is still inside the zone for which current monetary policy is appropriate. With inflation outpacing Bank estimates, upward revisions to the underlying CPI trajectory seem likely in the July monetary policy meeting, suggesting that April announcement and MPR may have been the peak of the BoC’s dovishness this year.

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