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July 22 (Reuters) - Canada’s annual inflation rate in June posted its biggest acceleration for more than nine years, rising to 0.7% from a 0.4% decline in May as energy prices jumped, Statistics Canada said on Wednesday.
Analysts polled by Reuters had expected the annual rate to increase to 0.3% in May.
Market reaction: CAD/
ROYCE MENDES, SENIOR ECONOMIST AT CIBC CAPITAL MARKETS:
“This wasn’t unexpected. It’s a little bit more of a rebound in prices than consensus saw or even our above consensus forecast. But It’s consistent with an economy that was almost completely shut down in many ways in April but is beginning to heal over the past few months.”
“In terms of the Bank of Canada, I don’t think it has a lot of bearing on what the central bank plans on doing with policy. The key to remember here is the bank is trying to get a sense of the underlying pace of inflation. So this one month move, while large, in isolation, probably won’t change their view of the economy and how much inflation it’s likely to be able to generate.”
“The bank will be focusing on things like the unemployment rate, the output gap, the global economy to try to get a sense of how much inflation the economy can actually generate. And all of those things seem to suggest that, while I think any fears of deflation were somewhat premature at this point, the inflationary environment will be tame at best at undershooting the Bank of Canada’s 2% target.”
MARK CHANDLER, HEAD OF CANADIAN FIXED INCOME AND CURRENCY STRATEGY AT RBC CAPITAL MARKETS
“It was firmer than we were looking for. It looks like some of it is due to supply constraints, but some of it is tied to demand that we’re seeing.”
“With respect to supply constraints, you had the record increase in beef prices that were tied to processing plants that had been shut down earlier. And then clothing and footwear prices bounced back as stores reopened. Somewhat surprised that there’s a modest uptick of two of the three core measures. A little bit firmer than we were looking for.”
“I don’t think it will shake the belief in the Bank of Canada that a wide output gap will keep the inflation pressures low. But it’s something to monitor going forward.”
“We know from the retail sales report yesterday, the flash estimate for June, as well as our own proprietary card spending data that you did get a bounce back in consumer spending in it looks to be early July that was above a year ago.”
“There is some pent up demand there. Our guess is we’ll start to see some of that dissipate, in particular some of the benefits begin to run out at the national level. But for now the savings rate has been built up while people didn’t have the same opportunities to spend and at the first opportunity for things to open up, you’re seeing a bit of reaction both in sales and alongside it a bit of increase in prices. If you believe the Bank of Canada, things are still going to be bumpy as we go along.”
DEREK HOLT, VICE PRESIDENT OF CAPITAL MARKETS ECONOMICS AT SCOTIABANK:
“I’d expected a little bit more disinflation pressure in the core measures but we didn’t get that now. But I think it’s still early.”
“There are longer lags on the full effects of the pandemic on CPI... because it takes time for the massive rise in spare capacity and the lagged effects to operate on reduced pricing power… that’s why we don’t have the peak effect on core inflation until toward the end of this year when it goes below 1% in our forecasts.”
“The Bank of Canada’s stimulus... was a preemptive form of action in anticipation of the argument that you’d get this weakening of inflation pressures. But right now they’re on hold. I wouldn’t expect much more out of them as they monitor the recovery in the virus.”
DOUG PORTER, CHIEF ECONOMIST AT BMO CAPITAL MARKETS:
“I think the Bank of Canada will be a little bit relieved that the trip into negative inflation didn’t last long. While it is higher than expected I would view this as good news.” (Reporting by Allison Lampert in Montreal, Nichola Saminather in Toronto and Steve Scherer in Ottawa Editing by Denny Thomas)
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