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Canadian Inflation Rises, Retail Sales Fall

James Boston
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**The Bank of Canada Consumer Price Index Core figures for January (YoY) have just been released, the headline figure is 1.4% against a forecast of 1.3% and a December figure of 1.3%. Additionally, the Retail Sales number for December (MoM) has been published at -1.8%, a minor surprise given the market was prepared for a figure closer to -0.5%**

Discussions among Canadian central bankers are unlikely to differ substantially from those of their counterparts in the central and reserve banks of other developed economies. As the recovery begins to take hold Canada is being confronted with similar data sets and facing the same challenging decisions as elsewhere. Commodities play a central role in the Canadian economy so it is not surprising to see actual and forecast GDP growth a somewhat more robust than that of its peers, what is surprising however is that unlike the US, UK and Eurozone, Canada is struggling to bring unemployment under control.

The benchmark lending rate in Canada has flat lined at 1% and despite an enviable 2014 GDP growth forecast of 2.5% the Bank of Canada is highly unlikely to consider monetary tightening until unemployment comes back in line. This position is comfortably sustainable so long as the weak Canadian Dollar and high commodity prices don’t considerable contribute to rising inflation. Canada is fortunate to have ample scope to absorb a degree of inflation creep and so today’s numbers will be unlikely to unnerve the market too much, they do however contribute to the case for monetary tightening sooner rather than later.

The Canadian Dollar has been in steady decline for almost 6 months, falling as much as 10% against the already weak US Dollar. In the last 24 hours USDCAD has risen almost 2 figures to test the long term resistance point of 1.1197. The data just released has attracted some CAD buyers to take this pressure of, this is despite the poor Retail Sales number which although it missed consensus was far better than some worst case scenarios were predicting.

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