The headline says it all, again Energy is the main culprit for April’s high inflation number (YoY increase if 17% for crude and 26% of gasoline). There’s not much that Canada can do about energy prices, in fact removing energy from the total CPI leads to inflation to be 2.0% and core inflation to be 2.4% (the impact of lower summer prices on vegetable is a net negative on the index).
Of course an open economy such as Canada has will always face external factors (Canada is a price giver in no segment – maybe excluding Maple Syrup…). Although the Canadian capital market continue to expect tightening with increase in interest rates, timing has slipped to Q4/11 (with a 25 bp hike) and maybe another hike in the early part of 2012. Market perceptions are extremely fluid, a week ago a Q3 and Q4 hike was “baked-in”, and today the market takes the view that any tightening will happen rather in late Q4 and early Q1/12. Among certain economist there is a perception that the recent inflation burst was “transitory” and based on a specific factor: all commodity prices have exploded over the past 12 months. Early this morning, GS began reversing its view on fuel cost, with a prediction that Brent crude was on its way back to $130 (from about $111/bbl today), and that the correction of the past few weeks was a ‘buying opportunity”
(Source: StatsCan)
We shall see, the CAD is now back to the 102/98 level against the USD, and the Euro is down all the way to 1.41 this AM (it was near 1.50 two weeks ago). Again this is not a predictive piece just an observation. The BoC must be a little freaked out over the downgrading of Italy over the weekend and of the UK Tuesday morning.
There are those who fear a sudden Chinese slowdown – again my question is how would anyone know? Data out of China is notorious for being unreliable, driven by policy requirements, as opposed to reality.