Analysts at Capital Economics now expect inflation to surpass the upper limit of the Bank of Canada’s 1% to 3% range for most of the rest of the year. Still, they continue to think that inflation will drop back to less than 2% in 2022.
Key Quotes:
“The focus has been on US inflation this week and, after the upside surprise in April, we now expect inflation there to be above 4% for much of the year. Similar price pressures will be evident in Canada as the economy re-opens, but there are two key reasons why inflation is unlikely to rise by as much.”
“The view of policymakers on both sides of the border, that the rise in inflation will be transitory, looks more justified in Canada. The exchange rate plays a larger role in determining inflation and the rise in the loonie, which is up by 15% y/y against the USD, will soon put downward pressure on goods inflation.”
“With the loonie acting as a pressure valve and little sign that wage growth will take off, we expect both headline and core inflation to drop to less than 2% in 2022. This implies inflation will be below 2% again by the time the Bank’s conditions for raising interest rates have been met,”