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Canada Core Inflation at Lowest Since 1999: Key Takeaways

June 23, 2017


Canadian inflation continued to ease in May, with a key gauge of price pressures at the lowest since 1999, a trend that will challenge the Bank of Canada’s recent efforts to set the stage for a rate increase.

The consumer price index rose 1.3 percent in May from a year ago, down from an annual pace of 1.6 percent in April, Statistics Canada reported Friday from Ottawa.

Measures of annual core inflation, a key indicator tracked by the Bank of Canada that excludes volatile components such as gasoline, fell to the lowest in almost two decades. The average of the central bank’s three core measures declined to 1.3 percent, the lowest since March 1999.

Key Points

The Bank of Canada last week began to play down sluggish inflation numbers, suggesting they were simply capturing the lagged effects of past excess capacity. But the numbers are below their forecasts. Inflation for the first two months of the second quarter is averaging 1.5 percent, versus Bank of Canada forecasts of 1.7 percent. Economists surveyed by Bloomberg had forecast inflation would slow to 1.5 percent from 1.6 percent in April on lower gasoline prices. Prices rose 0.1 percent on a monthly basis, lagging the 0.2 percent median economist forecast. The Bank of Canada’s ‘common’ core rate was 1.3 percent in May, the ‘median’ core rate was 1.5 percent and the ‘trim’ measure was 1.2 percent. Recent changes in electricity policy in Ontario seems to be having an impact. Electricity prices in that province were down 16.1 percent year over year in May, bringing inflation down in Ontario to 1.4 percent from 1.9 percent in April.

Big Picture

Inflation is important to the central bank since its mandate is to target inflation at 2 percent, an objective it has largely failed to deliver on over the past five years. When it talks about being less concerned about inflation, the Bank of Canada gives itself more leeway to talk about hiking interest rates, as it’s started do.

Other Details

On a seasonally adjusted basis, consumer prices fell 0.2 percent in May. Gasoline prices fell 4 percent in May. Year-over-year, gasoline prices were up 6.8 percent. That’s down from a 15.9 percent increase in April. The gap between goods and services inflation is widening. Price increases for services were 2.3 percent in May, compared with 0.1 percent for goods. The difference between the two rates was the widest since 2015.

What Economists Say

Nick Exarhos, CIBC Economics: Services inflation “is a better indicator of domestic slack, and where underlying inflation trends are heading. All told, a softer indicator on CPI, but something the market has gotten used to, and the trend in crude may be more instructive over the coming weeks for the path of inflation breakevens.”

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