Inflation holds near the Bank of Canada's target

Economy is now running up against capacity constraints, analysts say

Inflation holds near the Bank of Canada's target
Canadian inflation hovered at about the central bank’s 2% target for a second month in December, the result of a year of strong growth that is finally beginning to produce signs of more normal price pressures.

Annual inflation was 1.9% in December, slightly down from 2.1% in November, Statistics Canada reported late last week in Ottawa. It marked only the second time in the past three years the economy has produced two-month inflation averaging at least 2%.

The price strength reflected an economy running up against capacity constraints following a stellar performance in 2017. That is adding pressure on the Bank of Canada – which has kept the expansion going with low interest rates – to keep hiking borrowing costs to more normal levels.

“This is firm enough to keep the Bank in tightening mode, but still mild enough to keep the tightening pace gradual and cautious,” Bank of Montreal chief economist Doug Porter said in a note, as quoted by Bloomberg.

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Investors are anticipating at least two more increases this year, after the Bank of Canada hiked borrowing costs three times since July.
The pick-up at the end of 2017 brought average inflation for the year to 1.6%, which was stronger than 1.4% in 2016 and 1.1% in 2015. The Bank of Canada is expecting that inflation will stay at about 2% on average over the next two years – in line with an economy around full capacity.

The average of the Bank of Canada’s three key core inflation measures – which excludes volatile items such as energy and is considered a gauge of inflation pressures – rose to 1.8% in December, the highest since October 2016.

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