MNI BOC STATE OF PLAY: Looking Through January CPI Dip

By Yali N'Diaye

     OTTAWA (MNI) - While signals have been mixed on the activity front, raising

the odds of the Bank of Canada pausing its tightening process in March, January

inflation data confirmed the upward trend that started in mid-2017.

     Data released Friday by Statistics Canada showed that total inflation rose

1.7% year-over-year, more than analysts had expected as the base effect was not

as strong, but down from the 1.9 year-over-year gain in December.

     Monthly CPI indeed rose a robust 0.7% in January, the highest since January

2017, when it rose 0.9%. And while gasoline was the largest upward contributor,

along with telephone services to the monthly gain, seven of the eight major

categories increased from December.

     --CORE MEASURES HOLD

     Friday's data, however, are unlikely to change the BOC's outlook since its

analysis already factors in January's dip, through which, as a result, it is

likely to look.

     Instead the BOC should take note of the trend in its preferred measures of

underlying inflation.

     The range of three BOC's preferred measures of underlying inflation edged

up to 1.8%-1.9% from 1.6%-1.9% in December. CPI-common picked up to 1.8% from

1.6%, the largest gain since April 2012. CPI-trim and CPI-median were steady at

1.8% and 1.9%, respectively. 

     --MORE WAITING LIKELY

     While the upward trend in underlying inflation is consistent with the fact

that the output gap is virtually closed and that the labor market slack is being

absorbed, the central bank is still watching the impact of its cumulative rate

hikes.

     Indeed, elevated household debt and housing prices in overheated markets -

namely Vancouver and Toronto - remain high on the radar list of downside risks.

     "Governing Council will remain cautious in considering future policy

adjustments, guided by incoming data in assessing the economy's sensitivity to

interest rates, the evolution of economic capacity, and the dynamics of both

wage growth and inflation," the BOC reiterated in its January 17 statement.

     It added that "uncertainty about the future of NAFTA is weighing

increasingly on the outlook," and with still no signs of a NAFTA deal, this

uncertainty will continue to be expressed.

     --EYING FISCAL POLICY

     That being said, another factor will be known by the next meeting: the 2018

Budget to be presented on February 27.

     In a February 15 speech, Deputy Governor Lawrence Schembri said more

coordination - with fiscal and macroprudential policies - might be needed more

frequently in the future.

     Yet, little surprises are expected from the upcoming budget.

     A key question is whether and how Ottawa will respond to the U.S. tax cuts,

to maintain Canadian companies' competitiveness.

     Overall, however, analysts don't expect any significant news in terms of

borrowing requirements.

     "Having reached full employment, this isn't the time in the cycle for a

simulative boost to government spending," wrote CIBC economist Avery Shenfeld in

a commentary Friday.

     Overall, given the mixed activity data the BOC might give itself more time

and wait at least until April for a possible next move. However, the ongoing

upward trend in core inflation and wage growth call for further hikes down the

road.

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

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