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  • KPB & Co Research

The Bank of Canada (BoC) can rest easy for the time being given that inflation in July 2019 sat right on top of its comfort zone. Historically, the BoC maintained a target rate of around 2.0%, a rate which it believes would have a neutral impact on the economy. Prices during July 2019 was 2.0% higher than average prices for the same month one year earlier. On a month over month basis, average prices for July was only 1/2 of a percent higher. The relatively stable increase in prices happened while energy prices remained subdued, and food inflation remained strong.

Segment By Segment Breakdown

The 12-month inflation rate remained stabled as most of the items in the inflation basket recorded prices increases that were below 2.0%. Food inflation of about 3.8% created the greatest amount of inflationary pressure, followed by "Recreation education and reading" of 2.7%, and then shelter of 2.3% as the real estate market continued to expand albeit at a slower pace. A significant part of the combined inflationary pressure created by segments within the top three price increase was offset by a 3.2% price decline in the energy sector, which is a sector that has a huge weight in the inflation basket. All the other sectors, for example transportation, and Health and personal care had price growth of less than 2.0%.

Canada Inflation Rate For The Month of July 2019

As market participants continue to make sense of recent developments in the Canadian economy, a couple of things continue to blink on their radar. First, is future direction of the Bank of Canada given that inflationary pressures appear to be under control. The expectation is that the Bank of Canada should cut rates at their next meeting to reduce the downside risk to economic growth without fear of price hikes. Second, is the policy action by Chinese authorities and the Trump administration as it relates to trade. There is a concern that further actions that reduce likelihood of a trade bargain could further decelerate confidence, investment and growth markedly. If growth slows there will likely be spill-over deflationary impact in Canada, to which Canadian monetary and fiscal authorities would have to respond quickly.

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