MNI BOC ANALYSIS: Soaring Inflation Weakens Case For BOC Wait

By Yali N'Diaye

     OTTAWA (MNI) - Canadian Inflation reached a 12-month rate of 3.0% in July,

its highest in nearly seven years, weakening the case for more Bank of Canada

wait at a time indicators of activity continue to point to an economy operating

around capacity.

     The central bank was already expecting inflation to exceed 2.0%, but not to

the extent observed in July. The July Monetary Policy report had penciled in

inflation at 2.5% in the third and fourth quarters.

     CPI increased 2.3% the second quarter of this year, the highest level since

the first quarter of 2012, but close to the 2.2% projected by the BOC.

     --TOTAL VERSUS CORE

     While the BOC has made clear it was not acting on one single data point,

the trend has been upward and July is starting above where the BOC expects it to

be.

     However, the BOC's preferred measures of core inflation remained at target

with an average 2.0% in July, widening the gap with total inflation to a full

point, twice as much as the previous month, when inflation was 2.5%. That leaves

room for the central bank to wait for more data should it deem it necessary. The

case for more wait, however, has diminished.

     --STRONGER GDP, EXPORTS

     Canada GDP expanded by 0.5% in May after edging up 0.1% in April, the

largest gain in one year. While May's rebound partly reflected a return to

normal activity in some sectors after the weather's negative impact in April,

the gain in May more than offset April's weakness, and showed strength in the

economy beyond the reversal of the weather effects.

     In June, exports managed to climb 4.1%, the largest gain since November

2016, despite U.S. tariffs on imports of steel and aluminum from Canada since

June 1. In fact, exports to the U.S. rose 2.5%.

     Thursday, Statistics Canada reported that manufacturing sales increased a

further 1.1% in June, for a quarterly gain of 2.5% after a 1.4% increase in the

first quarter. On a volume basis, however, more relevant to real GDP, sales

growth slowed to 0.4% from 0.6%.

     --CAPACITY PRESSURES

     The Canadian economy still gave signs it is operating at a higher capacity

rate, with the manufacturing industry capacity utilization rate rising to 83.5%

in June from 82.8% in May.

     In the labor market, employment continued to expand, with 54,100 jobs

created in July after 38,400 were added in June.

     --WAGE GROWTH SLOWS

     However, wage growth as measured by the Labor Force Survey slowed down. The

pace of average hourly wage growth for permanent workers rose 3.0%

year-over-year, down from 3.5% in June.

     This brings the readings more in line with the Bank of Canada's

wage-common, which estimated the growth pace at 2.3% in the first quarter.

     --PRESSURE ON BOC INCREASES

     Overall, the case for more wait is weakening as the September 5 meeting

approaches, especially amid new hopes that China and the U.S. could be on the

way to address their trade dispute. That means the BOC is unlikely to cut down

its business spending outlook further on the ground of trade uncertainties,

especially since tensions have not escalated on the NAFTA front.

     The central bank could still argue it needs more time to assess the

economy's response to tighter monetary and macro prudential policies, but with

housing resales rising further in July for the third consecutive month, its case

on this ground is also weakening.

--MNI Chicago Bureau; tel: +1 312-431-0089; email: bill.sokolis@marketnews.com

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