OTTAWA: Canada’s CPI rose by 0.2% on a month-over-month basis (not seasonally adjusted) in February 2016, thereby matching the increase recorded in January; however, the latest month’s increase compared with an energy-driven 0.9% jump in February 2015, and thus, the year-over-year rate of inflation slipped to 1.4% from 2.0% in January. Market expectations had been for a stronger 0.4% monthly increase and an annual rate of 1.5% in February.
The decline in overall prices in February was largely driven by a 6.9% drop in gasoline prices that have now fallen in each of the last seven months. With gasoline prices having increased a year ago, the annual rate of change in this component swung from 2.1% in January to -13.1% in February.
Recent gains in oil prices, if sustained, should put upward pressure on gasoline prices in the near term; however, larger increases in the first half of 2015 point to the energy component remaining a drag on overall year-over-year inflation in the coming months. Monthly increases in prices for fruits (0.6%) and vegetables (0.1%) provided some offset to lower gasoline prices but to a lesser extent than in recent months, because February’s modest strengthening in the Canadian dollar limited upward pressure on prices of imported produce. Earlier currency depreciation was a significant factor in food prices rising 3.9% in the last year.
Excluding eight of the more volatile components of CPI (as well as indirect taxes), core prices rose by 0.5% on a monthly basis in February, thereby matching market expectations following January’s 0.3% monthly increase.
The monthly increase was due in part to a seasonal pickup in prices for items such as clothing and footwear (1.4% in February) and travel services (9.5%). Those seasonal increases, however, were less pronounced than last year when core CPI rose 0.6% month over month in February 2015. As a result, the annual rate of core inflation edged downward to 1.9% in the latest month from 2.0% in January.
The recent pickup in oil prices and attendant Canadian dollar appreciation, if sustained, will have opposing effects on inflation. A stronger Canadian dollar would limit the upward pressure from import prices that has been a factor keeping core inflation near the Bank of Canada’s 2% target in recent months. Rising gasoline prices should soften downward pressure on overall inflation, although a similar upward trend in oil prices last year would limit the extent to which higher energy prices boost the headline rate of inflation on a year-over-year basis.
Core inflation remains close to the 2% midpoint of the Bank’s target range, and price pressure is evenly balanced with 50% of core components at or above 2% year over year. It continues to be the case, however, that earlier exchange rate depreciation is putting upward pressure on import prices, with the Bank estimating the weak Canadian dollar added 0.5 to 0.7 percentage points to core inflation in the fourth quarter of 2015.
Underlying inflation remains subdued due to “material excess capacity in the Canadian economy,” and thus, the Bank of Canada’s attention is focused on how quickly that slack will be absorbed. In that regard, there have been positive signs of a rotation in growth recently, with strong trade and manufacturing data indicating offset to the energy sector slowdown is emerging.
The Bank is also waiting to judge how much support will be provided by fiscal stimulus, with the federal government’s budget set for release next week. We expect the Bank will remain firmly on the sidelines, holding the overnight rate steady at 0.50% this year, as the Canadian economy progresses through a “structural adjustment.”
