Statistics Canada reported this morning that the consumer price index (CPI) rose 1.0 percent year-on-year in January. This compared to a 0.7 percent increase in December and was slightly above the consensus expectation. The principal factor driving the increase was the price of gasoline, which rose 6.1 percent month-over-month as global energy prices moved higher. Gasoline prices have continued to rise through February, which strongly suggests that overall CPI will also continue to edge upwards.
The Bank of Canada's three preferred measures of core inflation were little changed in the month, averaging 1.5 percent. Thus both headline CPI and the core measures remain well below the Bank's 3 percent inflation mandate. Still, concerns are starting to emerge that the Bank's confidence that low inflation will allow it to keep rates on hold until 2023 may be misplaced.
Global commodity prices are rising, led by energy, metals and lumber, as optimism about the rebound from the COVID pandemic continues to build. This is excellent news for Canada's terms of trade, but could presage more generalized inflation pressures to come. Government pandemic relief programs remain in place. Indeed the Biden administration is determined to add massively to its own stimulus efforts, even as the pandemic seems to be easing and vaccination efforts ramp up. Finance Minister Chrystia Freeland, has described Canada's pandemic relief plans as "pre-loaded stimulus"; if Canadians stop saving and start spending as vaccinations roll out, pressure on consumer prices could soon follow.
Fixed income markets are certainly paying attention. US 10-year Treasury yields this week hit their highest levels in a year, and Canadian 10-year yields, though below year-ago levels (and still remarkably low in historical terms at 1.12 percent) are also moving higher. Definitely not anything to panic about, but definitely something to watch.
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