Editor Pick: Canadian Inflation and Sticky Prices
BMO Nesbitt Burns’ Douglas Porter takes a look at one contributor to Canada’s above-target core inflation: the slow adjustment of consumer prices to the stronger Canadian dollar, thus contributing to the debate on the role of the strong C$ in monetary tightening.
he notes: “Canadian consumers are far from reaping the full rewards of the massive run-up in their currency in the past five years. This is keeping inflation higher than it otherwise should be, contributing to the upward pressure on interest rates.“
BMO compared identical products sold through similar retail channels in the U.S. and Canada excluding taxes. “The striking aspect of the comparison between Canadian and U.S. prices on these goods is the near total consistency with which Canadian prices are well above their U.S. equivalents at today’s exchange rate. Using the average exchange rate of the last 18 months, these goods average at least 10% higher prices.
They cite Canada’s recent jump in core inflation to 2.5% (now the highest core inflation of the main industrial countries – and above the 2% target) home resale numbers, and unit labour costs, in joining a chorus of analysts expecting a rate hike in July – of which the Bank of Canada warned in its most recent statements.
Others, like Scotiabank also expect a rate hike but warn of possible over-tightening in areas outside of Alberta, especially in the manufacturing sector.
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