Will the Loonie Own the Podium?
The main question about this morningâ€™s Consumer Price Index is whether it will propel the Canadian dollar to parity with the American dollar. Higher inflation would increase the chances of our central bank raising interest rates sooner rather than later. Higher interest rates would make the loonie a more attractive holding for international financiers.
In fact, todayâ€™s figures show the annual inflation rate falling from 1.9% in January to 1.6% in February. With the Bank of Canadaâ€™s target range running from 1% to 3%, these figures hardly make the case for raising interest rates.
Perhaps more noteworthy was core inflation edging up from 2.0% to 2.1%. The Bank of Canada uses core inflation as a policy guide because it excludes volatile prices like food and gasoline.
Some people watch the exchange rate like an Olympic sport, cheering the loonie higher out of patriotism. (This patriotism is misguided because an excessively high Canadian dollar hurts our economy.) For these Olympic-style enthusiasts, higher core inflation may appear to bode well for higher interest rates and hence a higher loonie.
Ironically, core inflation was higher largely because Canada hosted the real Olympics in February. As a result, Statistics Canada reports that the price of traveller accommodation in British Columbia shot up 64%.
Thanks to the Olympics, B.C. definitely owned the podium in terms of inflation. Between January and February, the overall price level rose more than twice as fast in B.C. as it did nationwide.
Hotel rooms are part of the Consumer Price Indexâ€™s “recreation, education and reading” component. Nationally, the entire increase in this component over the past year occurred in February.
Traveller accommodation is included in core inflation because its price is not normally volatile (except for seasonal changes, which do not affect the annual rate.) However, higher hotel-room prices last month compared to February 2009 are clearly transitory. Therefore, in setting future monetary policy, the Bank of Canada should not put much stock in Februaryâ€™s slightly higher core-inflation rate.
It is difficult to predict how aggressively the central bank will raise interest rates or where speculators will push the loonie. But todayâ€™s Consumer Price Index figures provide no compelling justification for the higher interest rates that some speculators rightly or wrongly anticipate.