Inflation Makes the Canadian Dollar Bounce

Inflation Makes the Canadian Dollar Bounce

The Canadian dollar hit its highest level in November on Friday, following the release of inflation data showing that prices rose faster than expected in October despite the decline at the pump.

The consumer prices rose 2.4% in the 12 months ended in late October, while analysts expected an increase of 2.1%, according to Reuters.

“The increase in the index of consumer prices [IPC] ccurred in October is truly amazing as everything pointed to a decline. Not only the price of gasoline had decreased significantly according to preliminary data, but seasonal effects usually subtracted 0.2% to the monthly change in the CPI in October,” wrote in a note Benoit P. Durocher, senior economist at Desjardins.

Stéphane Marion, National Bank, noted that the sharp decline in the dollar in recent months has certainly helped fuel the rise in prices of imported products.

The direction of the grocer Metro (Tor., MRU) has referred to the increase in prices of goods bought at the publication of fourth quarter results earlier this week. Meat prices have particularly increased 10% over the previous year. Metro grocers are still trying to pass some of this increase to customers, despite the stiff competition among supply chains.

Debate resumed on rising rates

This surge in prices could force the hand of Canadian monetary authorities to warn that it will be necessary to increase the rate in 2015.

According to Mr. Durocher, maintaining the status quo on short-term key interest rates is appropriate given the uncertainties that persist with regard to the economic outlook. But he mentioned also that it is “clear that the inflation situation will be monitored closely in the coming months.”

David Madani, an economist for the independent firm Capital Economics, is as usual more nuanced than its counterparts in the banks. In his view, the Bank of Canada considers still necessary to maintain the interest rates to the floor because of the headwinds that could again switch the inflation rate below the target of 2%.

As a result, he does not believe that the data on the higher than expected inflation in October will encourage the bank to change its discourse against interest rate, which is rather neutral on this point.

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