National Bank of Canada’s analyst Krishen Rangasamy points out that the depreciation of the Canadian dollar has been a factor behind the rise in inflation in Canad and that could lead to the Bank of Canada to consider the inflation overshoot as temporary.
“It’s becoming clearer why Canada’s inflation rate has been picking up steam in recent months despite a widening output gap. This morning’s data from Statistics Canada showed a fourth consecutive increase for retail prices, the latter’s year-on-year increase hitting 1.6% in April, the highest so far this year. That extends the period of outperformance (relative to the U.S.) of Canada’s retail price inflation.
“Canada’s retail prices have outpaced those of the U.S. in part due to the depreciation of the Canadian dollar, the latter making imported items more expensive. What does that mean for monetary policy? If inflation is rising because of diminished slack, the central bank should start thinking about tightening policy. But if the price boost is coming from currency depreciation, then the Bank of Canada is likely to view the inflation overshoot as temporary.”