Canada Inflation Surges: Core Comes At 0.7% On 0.2% Consensus

A surprise out of the Bank Of Canada, which just announced that despite expectations for CPI coming at a modest 0.6% and 0.2% for the core, inflation was a blistering 1.1%, and 0.7% ex-non core items. Has the inflation genie finally come out of the bottle in the northern neighbor? While Goldman attempts to talk down this "ugly report", attributing the spike to a short-lived commodity spike (that's that temporary word again), the currency market was not as easily fooled: USDCAD moved a good 50 pips from 0.963 to 0.958 in seconds, giving the dollar another push in the race to the global currency bottom.

From Goldman

Sharp Increase in Core, Likely on Commodity Price Pass-Through
Large upside surprise in core inflation, pushing year-over-year figure much closer to Bank of Canada's target.

1. Canada's core CPI surprised sharply to the upside in March, rising 0.5% on a seasonally adjusted basis on the month and more than reversing the downside surprises of prior months. Two key factors explaining the sharp rise in the core index were clothing/shoes (+2.1% mom SA, the largest monthly increase on record, worth about 14 basis points on the SA core), and food (+1.6% mom SA, also the largest monthly increase on record; unlike the US core index, a large part of food is included in the Canadian core index--with a simple assumption that food prices rose equally across all categories, this would be worth about 30 basis points on the SA core). Given increases in cotton prices in recent months, commodity prices look to be a factor in both of these increases.

2. Headline inflation rose 0.8% on a seasonally adjusted basis, 3.3% year-over-year; while this was also an upside surprise relative to the consensus forecast, essentially all of this surprise is explained by the higher core. Gasoline prices rose sharply, as expected.

3. If there is any silver lining to this generally ugly report, it is that inflation due to commodity-price pass through is likely to be temporary. Without further increases in commodity prices, the peak impact on the CPI should be reached within the next few months.