July 22, 2020 / 12:47 PM / 23 days ago

Canada annual inflation rate jumps by most in nine years

TORONTO (Reuters) - Canada’s annual inflation rate in June posted its biggest acceleration for more than nine years, rising to 0.7% from a 0.4% decline in May as energy prices jumped, Statistics Canada said on Wednesday.

Analysts polled by Reuters had expected the annual rate to increase to 0.3% in May.

Market reaction: CAD/

Link: here

COMMENTARY

MARK CHANDLER, HEAD OF CANADIAN FIXED INCOME AND CURRENCY STRATEGY AT RBC CAPITAL MARKETS

“It was firmer than we were looking for. It looks like some of it is due to supply constraints, but some of it is tied to demand that we’re seeing.”

“With respect to supply constraints, you had the record increase in beef prices that were tied to processing plants that had been shut down earlier. And then clothing and footwear prices bounced back as stores reopened. Somewhat surprised that there’s a modest uptick of two of the three core measures. A little bit firmer than we were looking for.”

“I don’t think it will shake the belief in the Bank of Canada that a wide output gap will keep the inflation pressures low. But it’s something to monitor going forward.”

“We know from the retail sales report yesterday, the flash estimate for June, as well as our own proprietary card spending data that you did get a bounce back in consumer spending in it looks to be early July that was above a year ago.”

“There is some pent up demand there. Our guess is we’ll start to see some of that dissipate, in particular some of the benefits begin to run out at the national level. But for now the savings rate has been built up while people didn’t have the same opportunities to spend and at the first opportunity for things to open up, you’re seeing a bit of reaction both in sales and alongside it a bit of increase in prices. If you believe the Bank of Canada, things are still going to be bumpy as we go along.”

DEREK HOLT, VICE PRESIDENT OF CAPITAL MARKETS ECONOMICS AT SCOTIABANK:

“I’d expected a little bit more disinflation pressure in the core measures but we didn’t get that now. But I think it’s still early.”

“There are longer lags on the full effects of the pandemic on CPI... because it takes time for the massive rise in spare capacity and the lagged effects to operate on reduced pricing power… that’s why we don’t have the peak effect on core inflation until toward the end of this year when it goes below 1% in our forecasts.”

“The Bank of Canada’s stimulus... was a preemptive form of action in anticipation of the argument that you’d get this weakening of inflation pressures. But right now they’re on hold. I wouldn’t expect much more out of them as they monitor the recovery in the virus.”

DOUG PORTER, CHIEF ECONOMIST AT BMO CAPITAL MARKETS:

“I think the Bank of Canada will be a little bit relieved that the trip into negative inflation didn’t last long. While it is higher than expected I would view this as good news.”

Reporting by Allison Lampert, Nichola Saminather and Steve Scherer; Editing by Denny Thomas

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