Canadian inflation rises at a slower pace than expected. The CPI and the common CPI rose by 0.3% MoM, respectively 1.7% YoY, less than the forecast.
Inflation shows the increase in the price of goods and services over a period. In general, it is tracked on a monthly basis.
All central banks have a mandate that focuses on price stability. The definition of price stability differs from jurisdiction to jurisdiction. In Canada, price stability is defined as keeping inflation inside the inflation-control target range between 1-3%. In this case, the target is the midpoint of this range (2%).
In June, inflation did not rise as much as expected. The CPI increased by 0.3% compared to 0.4% expected and 0.5% in the previous month. When the inflation rate increases at a slower pace than before, it is called disinflation.
The Canadian Dollar Did Not React to the News
Statistics Canada calculates four types of inflation – CPI, common CPI, median CPI, and trimmed CPI. For market participants and the Bank of Canada, the annualised CPI data is the most important one.
In June, the CPI rose 3.1% on a year-on-year basis, declining from 3.6% in May. Therefore, inflation is above the upper range as defined by the inflation-control target, but not by much so that it triggers some action from the central bank.
Speaking of the Bank of Canada, it is one of the first central banks in the developed economies that started to trim down its asset purchases. While not a de facto tightening, the tapering of the asset purchases in Canada was justified by the rapid economic recovery and the rise in inflation.
The central bank would prefer the disinflation phenomenon to continue in the months ahead. However, a drop below zero would alter its plans for the second half of the year.
The Canadian dollar did not react to the inflation data. As seen in the chart above, the market was in a tight range ahead of the Federal Reserve of the United States FOMC statement and press conference. As it is often the case, the events in the US are more important for market participants.