Friday, October 21, 2011

Canadian Inflation: Not good at 3.2%

So the data is in, and headline CPI inflation is not good at all, in fact even the Core CPI is higher -- below the 2% threshold but at 1.9% (1.5% last month) this is at the upper limit (I would say a little beyond) what the Bank of Canada wants (in fact the BoC has a 1% -- 3% target CPI band).  

Headline inflation has been (two months running) above the target set by the BoC some years ago, bottom line energy prices are much higher than they were a year ago (14%), but so is everything else.  Canada's reality is that, very much like the U.S., it is a service economy, a labor is much tighter in Canada -- strike threats are in the air all the time (in the case of Air Canada literally) because the labor market -- while not drum tight -- is still getting tighter.  Just an FYI gasoline prices in September 2011 were 22% higher than a year earlier.  No graph today, they are meaningless -- prices are rising and the BoC's hands are tied.  Only actor that has some room to maneuver is fiscal policy... no news on that front. 

The impact is now being felt (surprise, surprise) in the interest rate futures market, that had for serveral weeks now been implying the risk of cuts in the BoC directors rates, that has now ebbed to a point where the futures are essentially flat -- there is no pressure (there never was much) for interest rates to fall, nor is there for interest rate to rise -- exogenous events (Europe, America and China) guide Canada's monetary policy right now.

Speaking of which, the Europeans seem to be doing their best efforts tor educe expectation of the weekend summit.  Frankly, since their failure spans nearly two years now, it is hardly surprising.  Merkel needs to decide if she is ready to leave the political scene -- because that would be the impact in agreeing to the "enlarged" EFTF program (whatever form it eventually takes).  Worse for Merkel and Sarkosy is whatever political chip they pay to get this deal done, the reality is that all the projects being "announced" fail in their intent.  This crisis (with Greece being its current center point) is not a liquidity crisis (all the EFTF programs talk about liquidity) it is a solvency crisis.  Greece could deflate its way to competitive pricing, but the pain (and time frame) are unacceptable to the population (they will get replace the current government with one that promise the end of pain!  I'm not making an analogy here in the type of regime that will result in Greece, but that is exactly how Hitler came to power -- he promissed "to end the pain of reparation").


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