Canada Economics Weekly: Stale summary of deliberations, stale inflation data

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Canada Economics Weekly: Stale summary of deliberations, stale inflation data

res for a sense of underlying

inflationary pressures.

On conducting monetary policy in the face of supply shocks, the feedback from

community conversations indicated “that they would be willing to tolerate inflation

slightly above 2% if it meant businesses kept running and people stayed

employed.” This would suggest some support for looking through some negative

supply shocks.

Little evidence of stronger core inflation in hard data

Headline CPI was stronger than expected in May, rising 1% MoM and to 3.2% YoY,

due partly to rising energy prices but also as components that had been

surprisingly soft in April (food at home, recreation services) rebounded in May.

There could still be some upside to components like airfares and recreation services

in June as higher jet fuel costs impact summer flights and given some stronger

travel demand with summer sporting events. But falling gasoline prices in June will

help offset these upside risks. We are currently penciling in 3% YoY for June CPI.

Most importantly in May data, core inflation measures remain subdued. Monthly

increases in CPI-trim, CPI-median, and CPI ex food, energy, and taxes were a bit

stronger than in previous months (annualizing around 2–4%), but this is not too

surprising or concerning to us given many months of core inflation annualizing well

below 2%. On a year-on-year basis, core measures remain close to target (some a

bit above, some a bit below).

We are still a bit cautious around potential upside risks to core inflation as survey

data show businesses have planned for some larger price increases. But with

energy prices now falling substantially and still soft demand, input costs only