The Rising Dollar and Canadian Inflation
There’s a piece by Heather Scoffield in today’s Globe on the issue of the impact of exchange rate appreciation on consumer prices.
TD Bank argues that only a modest portion of the fall in import prices is being passed on, while Philip Cross from Statscan argues there is a much tighter link. On the face of it, he has the stronger argument given that the year over year increase in the Canadian CPI for goods was -0.4% for goods (heavily imported from the US and Asian countries with currencies tightly linked to the US dollar) vs a 3.8% price increase for services which have a very low import content.
I quickly checked the Canadian against the US CPI (August 07 over August 06) and find that Canadian inflation is lower than in the US (1.7% vs 1.8%) despite stronger GDP growth, and that food and energy inflation are both lower than in the US (2.4% vs 4.3% and -3.7% vs -2.7%, respectively.) The Canadian dollar appreciation may not be being passed on in full – just as the low dollar did not lead to much higher Canadian inflation than in the past – but it does seem to be having an impact on consumer prices.
With inflation being held in check in a significant way by our rising exchange rate even before the dizzying rise of the past few days, the Bank of Canada could and should be matching the US rate cut.