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What will the Bank of Canada do with 2.4% inflation?

Yesterday, Statics Canada reveled the inflation for Canada in the last month of the year.  The news was not so good, the CPI rose by 2.4% (annualized), the rise in prices was due in no small part to higher gasoline prices (+13% YoY), even core CPI was 1.6%, down from 2.1% last month.



Question is does the BoC need to do anything about this?  CPI inflation has moving higher, and (as can be seen above) away from the BoC's 2% mid range target, but within the scope of the BoC's recent reports.  In short not much, moreover its not clear that much can be done, since the price rise of raw material is exogenous to Canada.  Even if we have a recession in Canada, energy prices will not fall.  Moreover, Canadian PPI (producer price index) have been rising faster than the CPI -- for a year now, which indicates that Canadian companies are unable to pass-on some of the price increase they face, leading to margin compression.

Canada's currency remains above parity, despite oil price falling back to the $85/barrel range -- a strong currency acts as a growth dampening mechanism.  Maybe the BoC's best bet are the Canadian federal government's fiscal tools.  Banks are already cautious, in fact bank lending conditions only recently started easing (following the 2008/09 crisis), banks are under leveraged (excess capital), and short term interest rates are in the one year 75bps and two years 140 bps than in the U.S.  Moreover, the recent reduction in the term of Canadian mortgage (from 35 to 30 years) and the reduction in LTV on which banks can lend will have a dampening effect on Canadian consumption.

Since the BoC expected this small spike and have already seen many tightening measures implemented, it will  just have to wait for these moves to take effect.  One thing for sure, Canadian economic growth remains driven by demand and not quantitative easing, so the economy is fundamentally sound.

Turns out, there's nothing to see here!

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