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.

One comment

  • This issue has been over-looked by the BOC and, until now, underplayed by economic commentators from the right (including Statscan).The rising dollar has a deflationary impact across the economy while Dodge and Co., until the credit crunch, have been giving us their usual nonense about how wage increases much be closely watched as they threaten macroeconomic stability by creating inflation. Meanwhile, asset inflation is of no concern to them.
    The argument for a price watching mechanism is very strong. The indexes do not provide a look at how cross-border monopolies use exchange rate variations to take extra dividends. The NDP and the CLC should be calling for some way of getting at price gouging, through a suveillance mechanism. The consumers association was lost years ago. Maybe an arms length independent body charged to protect the standard of living/quality of life would work.

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