Canada’s Annual Inflation Climbs 2.1% in November

The Canadian dollar is generally categorized as a commodity currency due to its direct correlation with the price of crude oil. Canada’s biggest export revenue earner is crude oil. So, it is obvious that a volatility in the price of crude oil is reflected in the loonie. However, the relationship has been broken in the past few months. Analysts provide two reasons for the overall change in the behavior of the currency.

Firstly, the market believes that the recent rise in the price of crude oil is not due to an increase in demand but through an effective manipulation by the OPEC cartel. Secondly, the benchmark interest rates have become the leading driver of the loonie, rather than the price of crude oil. Thus, the market is reacting positively or negatively only to data that may affect interest rate decisions by the Bank of Canada. In this regard, two vital economic data – core inflation and retail sales – reflecting the overall economy was released yesterday.

According to Statistics Canada, consumer prices increased 0.3% m-o-m in November, up from 0.1% in the earlier month, and greater than 0.2% anticipated by analysts. On an annualized basis, inflation rate increased to 2.1%, the highest level in a year. In October, Canada’s annual inflation rate accelerated to 1.4%. The inflation rate has now exceeded the Bank of Canada’s target of 2%. In June, the inflation rate hit a two-year low of 1%. Generally, inflation data influence interest rate decisions of central banks across the globe, including the Bank of Canada.

CBC News

Statistics Canada also reported an increase in retail sales to $49.9 billion in October, up 1.5% on m-o-m basis. It was far higher than 0.3% growth reported in September and 0.2% anticipated by analysts. An increase in new car sales contributed to the strong rise in retail sales. Excluding the sale of automobiles and spare parts, retail sales increased 0.8% in October, compared with a 0.3% growth in the previous month.

Economists had expected Canada’s retail sales to increase by a maximum of 0.4%. The strong inflation rate and retail sales growth support analysts prediction of another rate hike in January. The only concern, however, to economists is the negative impact of NAFTA negotiations on investments in Canada.

---