Lackluster growth, slowing domestic demand and cooling housing will also keep inflationary pressures in check. We expect inflation trends to remain soft in the coming quarters. Core inflation eased further in September to 1.5% y/y, bringing the Q3 figure to 1.6%. This was in line with the BoC’s revised estimate, which was released in October, days before the release of last month’s data. The BoC expects a similar inflation rate for Q4, consistent with RGE’s expectations, which point to continued slack in the Canadian economy, which will restrain prices.
In contrast, higher commodity prices are boosting headline inflation, which jumped to 1.9% y/y in September from 1.7% in August. This brought the average Q3 reading to 1.8% y/y. The divergence between core and headline inflation appears set to continue in Q4. The increases in agriculture and energy prices should boost the food and energy components of the headline measure. Food and gasoline account for more than one-fifth of the consumer expenditure basket and these increases are obscuring declines in other sectors. Inflation excluding food and energy prices stood at a mere 1.4% y/y in September, although the figure has been edging up in the past four months.
Core and Headline Inflation Have Been Diverging
Source: Statistics Canada
However, these inflationary pressures should have little impact on the core inflation tracked by the BoC, as these volatile items are excluded from the calculations. Core inflation has decelerated markedly after breaching the 2% midpoint of the target in early 2010. With the slack in the economy being absorbed at a slower pace than the BoC previously estimated, price pressures should remain muted in 2011.
Editor’s Note: This post is excerpted from a much longer analysis available exclusively to RGE Clients: North America Focus: U.S.: Fed on the Defensive; Canada: Retail Sales Still a Bright Spot?
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