MNI DATA ANALYSIS:Gap Widens Between Cdn Total, Core Inflation

By Yali N'Diaye

     OTTAWA (MNI) - The gap between Canadian total and core inflation widened in

July, with total inflation reaching 3.0% year-over-year, while the average of

the Bank of Canada's preferred core measures was little changed at 2.0%.

     The services inflation rate reached 3.2%, the highest since November 2008,

while goods CPI rose 2.8% year-over-year, the largest gain since February 2012.

     Overall, the gap between total inflation and the average of the BOC's

preferred measures of inflation widened to 1.0 point from 0.5 in June, and 0.3

in May.

     -GASOLINE, AIR TRANSPORTATION

     The peak travel season coincided with a 28.2% jump in air transportation

prices, the second largest upward contributor after gasoline prices, which were

up 25.4%, the largest increase since June 2011.

     Gasoline alone explained 0.8 point of July's gain, as CPI excluding

gasoline was up 2.2%.

     Food purchased at restaurants were the third largest contributor, and

likely continued to be impacted by minimum wage gains, notably in Ontario since

the beginning of the year.

     Meanwhile, the increase in interest rates continued to put upward pressure

on the mortgage interest cost index, with no reason to turn around as monetary

policy continues to normalize in Canada.

     -TARIFFS, WEAKER LOONIE

     While some analysts cited the impact of tariffs on imports of C$16.6

billion of U.S. steel, aluminum, and consumer items as a possible, albeit

modest, source of upward pressure, such tariffs only came into effect July 1.

     In addition, Statistics Canada estimates that the direct impact, at most,

could add 0.07 percentage points in the annual Canadian CPI, assuming that C$600

million of tariffs per year are passed through to consumer prices.

     So tariffs were unlikely to be a decisive factor in July's inflation pickup

from 2.5% in June.

     The weaker loonie, which was worth 80 U.S. cents at the beginning of the

year and only about 76 U.S. cents now, could also explain some of the upward

pressure on total inflation. However, not nearly as much as the jump observed in

July.

     -CORE INFLATION HOLDS

     While air transportation and gasoline prices sent total inflation to 3.0%

year-over-year, the BOC's preferred measures of underlying inflation held around

the 2.0% mid-range target.

     The range ticked up to 1.9%-2.1% from 1.9%-2.0%, as CPI-trim edged up to

2.1% from 2.0%, while CPI-common and CPI-median remained steady at 1.9% and

2.0%, respectively.

     So all in all, it remains to be seen whether July will mark a peak and

whether the gap between total and core inflation starts narrowing again once the

peak travel season is behind.

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

[TOPICS: MACDS$,M$C$$$]