Inflation surpasses BoC’s target. Now what?

By Staff, with files from The Canadian Press | March 23, 2018 | Last updated on March 23, 2018
3 min read

The country’s annual pace of inflation sped up to 2.2% last month to rise above the central bank’s ideal target of 2%, Statistics Canada said Friday.

The agency’s February data showed a significant boost to the inflation rate compared with the month before when it was 1.7%.

The report also found the average of the agency’s three measures of core inflation, designed to omit the noise of more-volatile items like gasoline, also continued its upward momentum last month and has now climbed slightly above 2%.

Inflation is a central piece of the information for the Bank of Canada’s interest-rate decisions and, with both readings above target, another hike could come even sooner than experts have anticipated.

Inflation is “not yet a scary monster, being essentially in line with what the Bank of Canada actually wanted to see,” says Avery Shenfeld, managing director and chief economist at CIBC, in a Friday commentary.

“While prices are gradually heating up, growth looks a bit soft, with January retail sales disappointing—with only a 0.3% rebound after December’s 0.7% drop,” he adds.

His BoC forecast is for the central bank to continue to hold as it waits for “more news on GDP, although markets today will emphasize the CPI in taking bond yields higher and the [loonie] firmer.”

James Marple, senior economist at TD, writes in his commentary that “the move higher appears broad-based, as evidenced by all three of the Bank of Canada’s core measures, which aim to strip out idiosyncratic price movements.”

He suspects the central bank’s “dovish tone of late will surely be challenged in light of today’s robust core inflation numbers.” Yet, he says, the “inflation target is symmetric: a slight overshoot of 2% is no ‘worse’ than an undershoot, and it is possible that minimum wage gains are pushing core measures higher—an impact that should be discounted.”

Marple is still calling for the BoC to hold rates this spring before a summer hike due to elevated “downside risks to the economic outlook.” The central bank will meet in April and May before its July summer meeting.


While last month’s inflation data “was hotter than expected,” Krishen Rangasamy, senior economist at National Bank, isn’t too excited, either. “This generalized uptick in prices is, however, consistent with an economy with no remaining slack after last year’s GDP surge.”

He, too, forecasts the BoC will “stick with its loose stance” over global uncertainty.

Nonetheless, “Assuming seasonal patterns hold in March, headline CPI is on track to grow in Q1 by 2.1% year-on-year (i.e. well above the 1.7% estimated by the Bank of Canada in last January’s Monetary Policy Report),” he adds.

The details

The inflation report said the main driver that pushed up year-over-year consumer prices in February was the higher cost of gasoline, which rose 12.6%, while pricier items like restaurant meals and passenger vehicles also had impacts.

The primary downward forces on prices came from cheaper video equipment, digital devices, hotels and electricity.

Year-over-year prices climbed in every province in February compared to the year before, with the strongest acceleration in Atlantic Canada.

The last time the overall inflation reading reached 2.2% was October 2014, just as the oil-price crash was getting underway, while the average of the core measures hasn’t been above 2% since February 2012.

Bank of Canada governor Stephen Poloz has hiked the benchmark interest rate three times since last summer, but he maintained the rate following a policy meeting earlier this month in order to buy more time to monitor trade-related uncertainties out of the United States.

At the time, the bank reiterated that more interest rate hikes would likely be necessary over time. However, it said the governing council would proceed cautiously when considering future decisions and would be guided by incoming data, such as the economy’s sensitivity to higher rates, the evolution of economic capacity and changes to wage growth and inflation.

In a separate report Friday, Statistics Canada said retail sales increased 0.3% in January to $49.9 billion, with the biggest increase coming from general merchandise stores. In comparison, retail trade fell 0.8% in December to $49.6 billion.

Also read:

How low inflation in eurozone could impact currency

U.S. inflationary pressures are muted, for now

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Staff, with files from The Canadian Press

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