Canadian CPI inflation likely to have risen in June 2018

19 / 07 / 2018 | Market News
The financial news on Friday July 20th 2018 is going to be marked by the economic data releases in Canada. The economy of Canada is a highly developed mixed economy with the 10th largest Gross Domestic Product (GDP) by nominal and the 17th largest GDP by Purchasing Power Parity (PPP) in the world, according to the International Monetary Fund’s (IMF) quarterly World Economic Outlook, published on December 10th 2017.

On Friday July 20th 2018, Statistics Canada, which is the official statistical office of the country, will publish data regarding the Consumer Price Index (CPI) inflation during June 2018. The CPI is an indicator used to measure the rate at which the prices of goods and services bought by households rise or fall, which is the rate of inflation, referred to as the CPI inflation.  The economists’ consensus is that the Canadian CPI inflation edged up, during June 2018, coming in at 2.5% on an annualised basis. If confirmed, it will constitute a 0.3% increase when compared with the May 2018 inflation figure. The annual CPI inflation rate in Canada stood at 2.2% in May 2018, the same as in April 2018, missing market expectations of 2.5%. Higher prices for shelter and transportation were offset by the slowing cost of food, household equipment, clothing & footwear.

 The Bank of Canada (BoC) aims at an inflation range of 1%-3%. In general, a high inflation reading is seen as anticipatory of an interest rate hike and is positive (or bullish) for the Canadian Dollar. On the contrary, a lower inflation figure than the one anticipated may have a negative effect on the Canadian Dollar’s exchange rates against its major competitors. 

The BoC is also expected to release data regarding the core CPI inflation during June 2018. According to a poll by Bloomberg published on Monday 16th July 2018, the majority of economists suggest that the Canadian core CPI inflation picked up reaching 1.4% in June 2018 on a year-to-year basis. In May 2018, the core CPI inflation, which excludes volatile items, had eased to 1.3% from 1.5% in April 2018, missing market expectations of 1.4%.

CPI inflation and interest rate hikes

On July 11th 2018 the BoC’s governing board hiked the Bank’s benchmark interest rate by 0.25%, bringing the overnight lending rate to 1.5%. This was the fourth time that the BoC has raised borrowing costs in the last 12 months. Market analysts had predicted the interest rate hike given firming CPI inflation and other signs of an economy close to capacity. 

A Wells Fargo report, published on July 11th 2018, noted that ‘core measures of inflation are near the middle of the BoC’s target range and headed higher. A weaker Canadian dollar, which has fallen in the wake of trade concerns, and new tariffs on U.S. imports will add upward pressure to inflation, along with growing capacity constraints.’ The analysts of the US bank commented on the Canadian GDP growth saying that ‘we expect Q1 to be the weakest quarter of the year, due to higher oil prices, stronger export growth and a stabilization in residential investment. Stronger monthly growth puts GDP on track to expand above 2.0 percent in Q2, at the upper end of Canada’s potential GDP growth range of 1.5-2.1 percent as calculated by the BoC. Growth faster than the long-term sustainable rate should further reduce space capacity in the economy.’

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