• Canada’s headline consumer price index (CPI) inched up 0.1% on a non-seasonally adjusted, month-over-month basis in July 2013, slightly below market expectations for a 0.2% gain.
• On a year-over-year basis, the inflation rate increased for a third consecutive month, by climbing to a, albeit still subdued, 1.3% rate from 1.2% in June and further above a recent low of 0.4% in April.
• The Bank of Canada’s core measure was unchanged on an unadjusted basis in the month and slightly below market expectations for a 0.1% increase. The year-over-year rate of growth rose to 1.4% from 1.3% in June.
• Both headline and core rates of inflation have moved higher on a year-over-year basis in recent months; however, the pace remains historically low with both measures still comfortably below the mid-point of the Bank of Canada’s 1% to 3% target range. We, like the Bank, expect inflation to drift gradually higher in the near term thereby reflecting still-anchored inflation expectations around 2% as well as an expected pickup in economic growth that will gradually absorb remaining excess slack in the economy. With that said, progress is likely to be slow, and we expect core price inflation to remain below 2% through 2014. While the upward drift argues that the Bank of Canada’s next move will still likely be to raise rather than lower rates, the overall muted inflation backdrop provides little pressure to make a change in the near term. We look for the Bank to raise the overnight rate in the second half of 2014 when the economy is closer to full capacity and both the headline and core inflation rates are approaching the 2% target.
The unadjusted all-items Canadian CPI index rose 0.1% on a month-over-month basis in July 2013, thereby pushing the annual inflation rate up slightly to 1.3% from 1.2% in June and further above a recent low of 0.4% in April. On a seasonally adjusted basis, consumer prices were up 0.2% from June in July, thereby matching the pace of growth in each of the two prior months. The Bank of Canada’s core measure was unchanged relative to June on an unadjusted basis and up 0.1% on a seasonally adjusted basis in July. Relative to a year earlier, the Bank’s core rate rose 1.4%, which was up from 1.3% in June and 1.1% in May.
Much of the monthly increase in prices, on an unadjusted basis, in July reflected a 1.3% increase in gasoline prices and a 4.1% jump in travel services. Offset was provide by lower vehicle prices in the month although the 1.8% decline in July this year was similar to the 1.9% decline a year ago thereby resulting in the year-over-year rate of growth for the component holding steady at 1.9%. Similarly, seasonal weakness was largely responsible for a 0.9% decline in clothing prices although the decrease was less than a year ago and resulted in the year-over-year rate of growth for that component rising to 1.5% in July from 0.8% in June.
Both headline and core rates of inflation have moved higher on a year-over-year basis in recent months; however, the pace remains historically low with both measures still comfortably below the mid-point of the Bank of Canada’s 1% to 3% target range. We, like the Bank, expect inflation to drift gradually higher in the near term thereby reflecting still-anchored inflation expectations around 2% as well as an expected pickup in economic growth that will gradually absorb remaining excess slack in the economy. With that said, progress is likely to be slow, and we expect core price inflation to remain below 2% through 2014. While the upward drift argues that the Bank of Canada’s next move will still likely be to raise rather than lower rates, the overall muted inflation backdrop provides little pressure to make a change in the near term. We look for the Bank to raise the overnight rate in the second half of 2014 when the economy is closer to full capacity and both the headline and core inflation rates are approaching the 2% target.
RBC