BOC State of Play: Inflation At A Turning Point?

By Yali N'Diaye

     OTTAWA (MNI) - For the first time in five months, total inflation

accelerated, as the 12-month rate rebounded to 1.2% in July, with transportation

and shelter contributing the most to the rise, Statistics Canada reported

Friday.

     While the current inflation level remains well below the Bank of Canada's

2% target, it was still an encouraging sign after total CPI fell from 2.1% in

January all the way to 1.0% in June.

     Two of the three BOC's preferred measures of core inflation also picked up

in July, bringing the range to 1.3%-1.7% from 1.2%-1.6% in June.

     At the top of the range, CPI-median, reflecting the price change at the

50th percentile - rose 1.7% year-over-year in July, from 1.6% in June. This

measure of inflation had been on a declining trend since July 2016.

     At the bottom of the range, CPI-trim - reflecting components whose rates of

change are located at the tails of the distribution - also ticked up 0.1

percentage point to 1.3% year-over-year.

     CPI-common - which tracks common price changes across categories - was

stable at 1.4%.

     The BOC had been looking through the softness of inflation in the first

part of the year, attributing it mostly to temporary factors, notably heightened

food price competition, electricity rebates in Ontario, and changes in

automobile pricing.

     "Because inflation is measured with a lag, reacting only to the latest

inflation data would be akin to driving while looking in the rear view mirror,"

it also said.

     As a result, it raised its overnight rate target to 0.75% on July 12.

     The BOC projects CPI to bottom out at 1.3% in the third quarter, after 1.4%

in the second quarter and 1.9% in the first quarter.

     It estimates that absent temporary factors, the underlying inflation rate

is 1.8%, with excess capacity explaining the 0.2 point shortfall.

     Clearly, July's figures should comfort the BOC's expectation of a CPI

rebound in months ahead, helping argue for continuing to remove the "insurance"

provided in 2015 through a 50 basis point rate cut.

     The question now is whether July will mark a turnaround, with any renewed

softness having the potential to delay further tightening and affect the

inflation outlook. On that front, it remains to be seen to which extent the

recent appreciation of the Canadian dollar against the greenback will be passed

through to retail prices. 

--MNI Ottawa Bureau; +1 613 869-0916; email: yali.ndiaye@marketnews.com

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