March 19, 2009
Canada’s headline inflation rate moves up; core rate holds steady
Canada’s headline inflation rate moves up; core rate holds steady
The February consumer price report confounded expectations, showing greater-than-expected inflationary pressure despite an environment of sharply contracting economic activity. Overall prices, on an unadjusted basis, rose a much stronger-than-expected 0.7% in the month that more that reversed the sharp 0.3% drop recorded in January. Expectations within financial markets had been for a 0.3% rise. The year-over-year rate rose to 1.4% from 1.1% in January. Unexpected pressure was also evident on the Bank of Canada’s core measure, which rose 0.5% in the month compared to a 0.4% drop in January. Expectations had been for this measure to rise only 0.1%. On a year-over-year basis, core inflation held steady at 1.9%.
The upward pressure in overall prices in the month was in part the result of a 5.6% rise in gasoline prices, up from a 5% gain in January. Less anticipated were the continuing strong gains in food prices, which rose 0.5% following a 0.7% gain in January.
On a core basis, the sharp reversal in the monthly rate was in part due to the declines in motor vehicle prices that occurred in January (-5.3%) not being repeated in February, with this component up a negligible 0.1%. More of the upward surprise on a core basis was due to economic weakness having little observable impact on limiting the seasonal increases in major components like clothing prices, which rose 2.5% in the month. Furniture prices were another major component that showed a surprisingly large 2.3% gain relative to January that seemed at odds with a weakening housing market.
Despite the greater-than-expected upward price pressures in the month, annual inflation on a core basis still remains below the Bank of Canada’s mid-point target of 2%. With indications that the sharp fourth-quarter 2008 decline in GDP growth of 3.4% will likely deepen further in the first quarter, the near-term risk to inflation is that it could move even further below target with unused capacity building in the economy. Thus, today’s report is unlikely to prevent the Bank of Canada from continuing to focus policy on reviving growth via aggressive easing in monetary conditions.
Official rates are already relatively low with the overnight rate at 0.50%, although this does provide some scope for further reductions, particularly with the Fed funds rate already at about 0%. However, recent comments by the Bank of Canada suggest that an equally likely near-term option is to inject additional liquidity into specific markets via credit easing and/or more generally into the financial system via quantitative easing.
The Bank of Canada has already indicated that the April Monetary Policy Report will spell out the central bank’s thinking as to the practicality and need for these policy initiatives. Actions by the U.S. Federal Reserve yesterday made clear that current weak economic conditions in the United States warrant the more aggressive quantitative easing actions overlaid onto enhanced credit easing that had already been put in place.
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