Bond Economics: Canadian Inflation Comments

So far, the gasoline price shock in Canada has not been as bad as what happened after the pandemic, but I am not incredibly optimistic about the medium-term outlook. The above figure is the national average cost for unleaded gasoline (at self-service stations if you want to get even more specific), but the data ends in March, so it is missing the price rise since then. In my neck of the woods in the Greater Montreal Area, the pump price has been around $2 per litre, although Montreal is normally higher than the national average series shown above.

The Carney government announced a temporary suspension of the excise tax on gasoline on April 14th, which dropped the price by about 11 cents per litre. This generated a lot of flak from economists, but I doubt that it will matter that much if the situation does not improve in the Middle East.

The Canadian CPI numbers for March were released today, and core inflation remains stuck at a level above the 2% target. This starting point makes it hard for the Bank of Canada to be too complacent in the face of commodity prices. 

The diplomatic situation around the Strait of Hormuz seems muddled, but it is clear that that full traffic flow will not resume immediately. This means that oil and gas fields will be shut in for an extended period, and restarting them will take time. As such, it is clear that regions that are dependent upon the commodity flows from the Gulf are going to be hit hard. Canada is not directly affected, but it will see a lagged effect of slowing growth elsewhere. At the same time, the signals from the White House remain belligerent towards Canada, and an attack on the Canada/Mexico/United States trade pact may occur once attention is drawn again to that topic. 

The Bank of Canada’s next scheduled policy rate announcement is April 29th, and I see no reason for them to switch from their last assessment that growth risks are skewed to the downside, while inflation risks are to the upside. In the absence of clear data, it seems unlikely that they will move in the near run.

Fiscal Policy?

Although the gasoline excise tax cut was unpopular with economists, it is still a limited measure that targets the fastest rising price in the economy. My uneducated guess is that fiscal policy is going to deviate much from already announced plans. There are currently no measurable growth risks that will cause panic loosening of policy. A global recession due to the commodity shock would take time to hit Canada (and as a commodity exporter, some sectors of the economy will benefit from higher commodity prices). A complete rupture of free trade with the United States is a scenario that might provoke a more rapid fiscal reaction. 

Without accommodative fiscal policy, the commodity price hike will tend to squeeze consumers, and so there might not be second-round price effects. (Although Canadian commodity exports would benefit, the employment in primary industries is not large enough greatly push the overall labour market.)