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Canadian inflation surges as core rate hits highest since 2012

Canadian inflation surges as core rate hits highest since 2012
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Canadian inflation quickened in May on increases across the board, giving the Bank of Canada plenty of scope to hold interest rates steady.

Firmer inflation gives the Bank of Canada reason to question the need for interest rate cuts, and provides ammunition to resist any easing trend in other advanced economies like the U.S. and euro area, where price gains have been more tepid. The Canadian dollar jumped on the report.

The stronger inflation numbers “are one reason the Bank of Canada faces less pressure to reverse course and begin easing monetary policy,” Josh Nye, a senior economist at Royal Bank of Canada, said in a note to investors.

Canada’s currency appreciated as much as 0.3% against the U.S. dollar, and was trading at $1.3354 (Canada) at 9:21 a.m. in Toronto. Yields on government 2-year bonds climbed 5 basis points to 1.46%.

Whether the Bank of Canada will be forced to match — at least in part — future rate cuts by the Federal Reserve is one of the biggest questions for investors. Markets are still pricing in at least one quarter-point cut in Canada over the next 12 months, amid concern that trade tensions between the U.S. and China will slow the global economy. The Fed, which will release its latest decision at 2 p.m. in Washington, is expected to cut rates by at least 0.75 percentage points over that time.

Diffusing expectations for lower borrowing costs in Canada is the fact that the policy rate in the country — at 1.75% — is below the Fed rate. The Canadian economy is also accelerating in the second quarter after a weak start to 2019, while growth is slowing in the U.S. after a strong start.

And inflation dynamics seem to be stronger in Canada. The average of the three key measures of core inflation rose to 2.1% in May, breaching the 2% threshold for the first time since February 2012. The inflation numbers are above what the central bank has been estimating.

On a monthly basis, the CPI increase was 0.4%, matching April’s pace and topping the 0.1% median forecast. The largest upside contributor to CPI on an annual basis was shelter costs, which rose 2.7%. Food and transportation were also major drivers.
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