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Inflation up (whoops!)

This morning reading the StatsCan web based news I was directed by error to the July inflation data, when in fact this morning StatsCan published its August data (I have removed the post since).

The August news was bad, real bad!  First fuel costs as a component of the CPI is actually down -- fuel prices in August were lower than in July, and yet inflation came in at 3.1% Year on year... Futures market is still pricing a reduction in rates (although with less conviction than it did last week), that's up nearly 0.4% (when the market was expecting at worse a +0.1% increase in inflation).  Question is what can be done? Joke is that inflation is always a monetary phenomenon (of course-- since the goods themselves have not changed!), Canada has been expanding credit (so maybe the BoC will talk to the banks to tighten credit rules -- one would have thought that the new mortgage rules would start to bit, but it seems that's not the case).  The principal tool available to the BoC after that are asking banks to increase reserves (but since banks are already keeping reserves in excess of the BoC's requirements).  BoC cannot touch short term interest rate.  Next the government can raise taxes (or at the very least compress expenses) -- but government don't like that too much (even the conservatives).

So lets see, the economic news for Canada:

  1. Canadian's per capital borrowing is nearly equal to the Americans', but whereas Americans are deliveraging Canadians are pilling debt at a rapid pace -- this is bad news (not terrible, but bad)
  2. The IMF (following the BoC last week) downgraded Canada's growth for 2011 from 2.8% to 2.1% ( still think this is optimistic -- 1% growth in Q1, zero in Q2...), so more bad news (although I cannot believe that this was not already priced in).
  3. Manufacturing is up (so that's good news, but then exports are in trouble so ordinary news)
  4. Inflation is going the wrong way (again) and is slightly about the 1% to 3% band that the BoC targets.
  5. Cash continues to flood Canada (another $11 billion in July) but its mostly being invested in S/T instrument -- so really hot money that's got to get up the BoC's nose!  (rumors are around that the amount of cash around is starting to really worry the BoC).  Can negative interest be far away here too for foreign cash depositors.  Second year when cash inflow in excess of 8% of GDP
No wonder the CAD is playing around parity.  

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