Inflation jump a surprise
OTTAWA—Canada’s annual inflation rate has leap-frogged the Bank of Canada’s target for the first time in more than two years, lifting the Canadian dollar to near 93 cents (U.S.) and boosting speculation about interest rates.
The loonie rose half-a-point early today after Statistics Canada reported annual inflation rose three-10ths of a point to 2.3 percent in May on the strength of higher energy prices and more broad-based price increases.
Core inflation, which discounts temporary volatility in such items as energy, also is proving stubbornly frothy.
It, too, rose three-10ths of a point to 1.7 percent, nearing the bank’s sweet spot.
Analysts said the half-cent jump in the loonie following the morning release of the report was based on the anticipation that Bank of Canada governor Stephen Poloz will need to tone down his warning about the risk of low inflation.
He also may be forced into considering raising interest rates sooner than expected.
“Not yet, but let’s just say a few people are thinking the bank may move earlier than expected,” said Douglas Porter, chief economist with BMO Capital Markets.
“It’s certainly eased concern about inflation moving below the lower bound and, with that, it’s pretty much eliminated the possibility of interest rates moving lower,” agreed RBC assistant chief economist Paul Ferley.
Last week, Poloz took heat from some analysts for maintaining the recent run-up in the CPI was a temporary phenomenon primarily fuelled by energy costs and that the real danger was a return to too low inflation.
“That ship has sailed,” said Porter.
While there is little danger of too strong inflation above three percent, there also is little reason to think the price index soon will drop below one percent.