Last October, the Bank of Canada (BoC) abandoned its rate-hike bias due to concerns about the country's persistent disinflation. Those fears seemed to be borne out by subsequent showings of Canada's consumer price index (CPI), whose readings for each month of the fourth quarter either equaled economists' gloomy predictions or were actually slightly worse.
But more recent results suggest that Canada's inflation could finally be heating up. In January, the country's CPI increased 0.3 percent month over month, exceeding the consensus forecast by a substantial two-tenths of a percentage point.
The core CPI, which excludes volatile components such as food and energy, rose 0.2 percent, beating expectations by a tenth of a point. On a year-over year basis, prices rose 1.5 percent.
And now with Statistics Canada's release of the latest numbers, we can see that February's results were even better on a trend basis, with the CPI climbing 0.8 percent month over month, two-tenths of a point better than projected.
Meanwhile, the core CPI rose 0.7 percent, also two-tenths of a point higher than forecast. On a year-over year basis, prices were up 1.1 percent. That's a deceleration from January's figure, though still a tenth of a point better than predicted.
These strong numbers make it increasingly unlikely that policymakers will lower short-term rates again. The central bank's overnight rate has stood at 1 percent since late 2010, the longest such pause in its history.
The BoC's primary mandate is to keep total CPI inflation at the 2 percent midpoint of a target range of 1 percent to 3 percent over the medium term.
Whenever inflation deviates from its 2 percent target, the bank adjusts the overnight rate with the hope of achieving the target within about two years, which is the time it typically takes for changes in monetary policy to flow through the economy. To that end,! economists with CIBC World Markets expect inflation to be near the bank's 2 percent target by year-end.
In response to the CPI as well as stronger-than-expected retail sales, the Canadian dollar rallied off its four-year low of USD0.8894, which it hit last Thursday. Since then, the loonie has climbed 0.8 percent, to USD0.8962. For those keeping score of its longer-term moves, the currency is down about 15.5 percent from this cycle's high in mid-2011.
In fact, the loonie's slide has likely been a key factor in shaking off the country's disinflation, though a 1.4 percent increase in an alcohol, beverages and tobacco tax also contributed to the latest headline number.
Since most commodities are priced in US dollars, Canadians are now paying higher prices on natural gas and gasoline, as well as for some food products, many of which are imported.
While a lower exchange rate will be helpful to Canada's export sector, some economists are worried that it could undermine business investment, since a significant amount of machinery and equipment is imported. In addition to achieving its inflation mandate, the BoC also hopes a weak Canadian dollar will spur exports and boost business investment.
Although private-sector economists believe Canada's economy will grow by 2.2 percent this year, much of that growth will occur during the second half. Despite some of the rosier economic data that have been released recently, a colder-than-normal winter is expected to weigh heavily on first-quarter gross domestic product (GDP).
The consensus forecast is for GDP to grow just 1.6 percent during the first quarter, which would be the slowest pace since late 2012. Of course, numerous economic data have had stronger-than-expected showings this winter, so it's still entirely possible that the broad economy could deliver its own upside surprise for the first quarter.
Subscribers to Canadian Edge get to read the full update, which includes our latest analysis of a company who! se shares! currently yield 5.2 percent and whose earnings per share are expected to jump 71 percent this year.
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