Canada Inflation


Canada: Inflation rises to highest level in eight months

October 22, 2010

In September, consumer prices rose 0.2% over the previous month, which contrasted the 0.1% drop recorded in August. Nonetheless, the reading overshot market expectations, which had seen consumer prices increasing only 0.1% over the previous month. As a result, annual headline inflation stepped up to 1.9% in September (August: +1.7% year-on-year), the highest level observed since January. The main drivers behind the annual reading were higher prices for food, which added 2.1% year-on-year as well as energy costs, which rose 5.6% compared to September 2009. Meanwhile, annual core inflation, which strips out gasoline and other volatile items, inched down to 1.5% in September (August: +1.6% yoy), and thus remained below the 2.0% target set by the Bank of Canada (BoC). Since the beginning of the third quarter, headline inflation entered an upward trend, with core inflation ? which is the reference for the BoC policy making ? trending in the opposite direction, corroborating the Bank's decision to halt the tightening cycle. Against this backdrop, the BoC revised its inflation forecasts downwards. According to the October Monetary Policy Report, the Bank expects headline inflation to average 1.7%, 2.0% and 1.9% in 2010, 2011 and 2012 ? against 1.8%, 2.1% and 2.0% reported in July. Consensus Forecast panellists broadly share the Bank's assessment and expect inflation to average 1.7% this year, which is down 0.1 percentage points from last month's forecast. In 2011, the panel expects inflation to accelerate to 2.0%.

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