Consumer Price Index (All-items) tracks the over all price change of a fixed basket of goods and services over time. Statistics Canada reports an average -0.8% change over the year, meaning goods and services are, indeed, 0.8% cheaper today than a year ago. (The graph below denotes the trend of CPI. Source: Statistics Canada)
In Calgary, the report presents a 33% drop in the “water, fuel and electricity” category, causing a 1.9% fall of all-items.
Given that the mandate of Bank of Canada is to meet the inflation target at around 2%, it is rather unlikely that short-term interest rate will be allowed to rise. Let’s shift our attention to the FX market for a moment.
Recall that the Bank of Canada has been warning against a high dollar. The only meaningful way to buck the upward trend is to sell large amount of Canadian dollars (or T-bills) in the open market to increase supply of money. Such a move would drive short-term interest rate even lower. Now that inflation is less of a concern, the Bank of Canada can carry out credible threat against a strong loonie. Mr. Jim Flaherty’s comment sounds even more silly now …
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