Canada’s inflation slowed to a year-over-year pace of 2.1% in July, validating the Bank of Canada’s scenario attributing the recent acceleration to “temporary” factors that are about to dissipate.
Total inflation had been accelerating for four consecutive months from +1.1% in February, to +1.5% in March, +2.0% in April, +2.3% in May and +2.4% in June.
In its July 16 interest rate announcement, the central bank acknowledged that its 2.0% mid-range target had been reached “sooner than expected.”
Yet it downplayed the four-month trend as being “attributable to the temporary effects of higher energy prices, exchange rate pass-through and other sector-specific shocks, rather than to any change in domestic economic fundamentals.”
The less volatile core index had increase from +1.2% in February 2014 to +1.8% in June, the fastest pace in two years.
The central bank nonetheless pointed out that despite this acceleration, core inflation still remained below 2.0%.
So the July reading of 1.7% following June’s 1.8% only reinforces this statement.
“For the inflation target to be achieved on a sustained basis in 2016, the economy must reach and remain at full capacity,” the BOC said, expecting the output gap to close “around mid-2016.”
That in turn “hinges critically on stronger exports and business investment,” the central bank said, in line with its expectation of a growth rotation that would become less reliant on consumer debt and spending.
Second-quarter data so far have shown some strengthening on the export front, but not so much when it comes to business investment.
So overall, the BOC has reasons to maintain its neutral stance and wait until signs of a revival of business investment become more evident and that the recent pickup in export volumes is not a temporary increase.