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Inflation is becoming a real problem in Canada

This morning from Statistics Canada:
Consumer prices rose 3.7% in the 12 months to May, the largest increase since March 2003. This follows a 3.3% increase posted in April. The increase in May was primarily a result of higher gasoline prices.
Granted that most of this increase was food and energy (respectively 5% and 16%), yet it remains that the 3.3% registered in April was suppose to be (according the Bank of Canada) a peak, and now it appears that the peak is even higher.  Virtually all sectors saw price rise (excluding clothing), with transportation the worse affected (since fuel costs are a very large component of this sector...).  


(Source: StatsCan)

The Canadian authorities are taking a very aggressive stance vis-a-vis the risk of exogenous shocks, the BoC's recent risk assessment tot he global financial system shows greater stress than 12 months ago, and yet the internal numbers are worrying.  Will the BoC eventually be forced to "overreact" on interest rate if it waits much longer. The Canadian market has largely discounted a rate rise  before May 2012 (Q2/2012), but of course this is only the futures market, that opinion can "change on a dime".  It remains that inflation pressures are strong in Canada due to "local" risks (a booming economy).  

I am no longer ready to put money on the table for a rate rise, but there is no doubt that as an investor, my fixed income duration exposure will remain relatively short (the 5y range), simply because the BoC eventual rate rise will probably not shift the yield curve, rather they will affect the slope of the curve (which works well for intermediary duration exposure).  I'm not that bright, but the steepness of the Canadian yield curve is near "historical" highs.

The current and inexplicable position adopted by the BoC brings to mind my reaction to the U.S. and U.K's initial decision to invade Iraq "they must have data that shows WMD that they are not releasing, they are just not revealing everything!"  I was naive, in fact, they had nothing and were actually goosing the data to create a false positive on WMD.  Again here I assume that Mark Carney (Governor BoC) has non-public information on the state of the global economy that worries him to such a point that he is concerned with an exogenous shock!  Maybe I am being naive here too?

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