Canada CPI: slightly better news

If you look at the headline measure and the Bank of Canada's favoured core measures, the Canadian CPI report for June, released by Statistics Canada this morning, was somewhat reassuring.  Headline CPI slipped to 2.0 percent year-on-year from May's 2.4 percent reading, and the mean of the three core measures edged lower in the month to stand at almost exactly 2.0 percent.

A look behind the numbers is slightly less comforting.  All eight major components of the CPI as tracked by StatsCan are moving higher, indicating that although price pressures are generally contained, they are widespread.  The fall in the headline number in June was entirely due to a year-on-year decline in energy prices, notably for gasoline.  Excluding the energy component, the increase in CPI for the month was 2.6 percent.

Headline CPI data have been distorted for the past year by unusually wide gyrations in gas prices. Higher gas prices in mid-2018 pushed headline inflation higher, but for the last several months the unwinding of that one-time impact has tended to pull the headline reading lower. Last year's surge should now be completely out of the index, so in the coming months headline CPI and CPI ex energy should tend to converge.  With energy prices potentially moving higher as a result of tensions in the Persian Gulf, this implies that headline CPI will be above target for at least the next few months.

Even if the Bank of Canada is prepared to tolerate above-target CPI in the short term, as it almost certainly is, there are other concerns. Chief among these is the upward trend of wages, which reached a 3.8 percent year-on-year gain in June.  The Bank of Canada is almost alone among major central banks in predicting a strengthening domestic economy over the next twelve months.  If this forecast is correct, the tightness in the jobs market that has allowed wage gains to accelerate will continue and perhaps worsen. 

The Bank's policy choices will be increasingly hemmed in by rising labour costs on the one hand and fears over the impact of a strengthening exchange rate on the other.  Governor Stephen Poloz may be quietly grateful that the imminent Federal election gives him the perfect excuse to stand pat for the next few months.