Today’s CPI release saw headline inflation rise from 2.2% in March to 3.4% YoY in April. The print was marginally higher than expectations, which sat at 3.2%, but despite the figure exceeding the Bank of Canada’s 2% target, it won’t cause concern among the Governing Council just yet.
This is because base effects had a large part to play in the increase in the 12-month figure as prices are compared to the April 2020 level when the pandemic took its toll on the economy – at which point, inflation fell 0.2% YoY. In this regard, similar to the US CPI data released last week, it is difficult for policymakers to distinguish between signal and noise within the report.
Additionally, with Canada’s economic recovery still in its juvenile stages, policymakers will be more than content to look through a transitory overshoot in inflation until a more holistic representation of the economic recovery is visible.
BoC members have already voiced this view in advance of today’s rise in headline CPI, which is why the corresponding market reaction was fairly muted to such a significant jump in the headline rate.
While month-on-month data removes much of the base effects and shows headline inflation rising 0.6% on a seasonally adjusted basis, the rise in prices is arguably due to the increase in input costs stemming from higher global commodity prices as demand-pull pressures remained contained by lockdown measures in April.
While there is no official measure of MoM core CPI for April, a brief look at the largest contributors suggest it would print at a more benign rate than the headline figure as the 1.8% increase in gasoline is removed. Following the release, USDCAD has realigned itself with the broader FX market move today after it briefly touched session lows after the CPI release. With the inflation data having little impact on policy expectations and front-end real rates, CAD traders return their attention to the freefall in WTI prices and the broad bounce back in the US dollar in today’s session ahead of the Department of Energy’s inventory data at 10:30 ET/ 15:30 BST.
Loonie retraces gains as CPI data has little bearing on BoC policy, attention pivots back to decline in WTI and broad USD bounce back
Author: Simon Harvey, Senior FX Market Analyst