OTTAWA - Inflation is the highlight of the coming week's economic calendar, and it could be among the key elements in helping the Bank of Canada decide when to begin raising interest rates from record low levels.
Economists anticipate inflation was higher on a year-to-year basis in April, rising to 1.7% from 1.4% in March, still staying below the central bank's 2% target. The core rate, which excludes volatile items such as energy and certain foods, is expected to rise to 1.8% from 1.7%.
Statistics Canada will report inflation data for April this coming Friday, which will be the last consumer price report before the Bank of Canada's next scheduled rate decision on June 1.
The central bank has recently eased off on its conditional pledge to keep its overnight target rate at a historic low of 0.25% until at least July, given the surprising strength of Canada's economic recovery.
"This is going to be a key [inflation] report," said Millan Mulraine, senior strategist at TD Securities, when asked about how it will effect the Bank of Canada's movement on rates. "In fact, it will more important than the GDP report [for the first quarter and March], which will come the following week."
Inflation was looking strong when the February data rolled in, with core inflation exceeding 2% for the first time since December 2008. The central bank previously did not anticipate price growth that strong until the second half of 2011.
However, much of February's inflation was thought to be a temporary condition prompted by the Winter Olympics held in Vancouver that month, and the numbers subsequently eased the following month.
Mr. Mulraine is expecting April's overall rate to be 1.9%, which is slightly higher than the consensus, and core at 1.8%, which is in line with other economists.
Surprisingly high numbers could cement the Bank of Canada's decision to raise rates in June, Mr. Mulraine said. However, he said a mitigating factor is the government-debt crisis in Europe. If that creates enough uncertainty over the global economic recovery, it could be an issue pushing the central bank to hold off on raising rates, he said.
CIBC World Markets economist Krishen Rangasamy has the same forecast numbers as Mr. Mulraine on April inflation, and said that should be enough for the Bank of Canada to move ahead with a rate hike in the coming weeks.
"With the headline and core inflation rising towards the BoC's midrange 2% target, and the negative output gap expected to narrow further in Q2, the bank can easily justify starting its tightening cycle in June," Mr. Rangasamy said in a research note.
Another report coming from Statistics Canada on Friday will be retail sales from March. The median estimate among economists is for flat numbers in comparison to February, when sales were up 0.5%.
However, TD's Mr. Mulraine is expecting a rise in retail sales for March equal in proportion to February's gain as a result of consumer activity and higher prices for gasoline.
"With a fairly robust domestic economy and strong labour market conditions, Canadian households are continuing to hold their side of the bargain, with consumer spending declining in only one of the last 14 months," he said.
But Mr. Rangasamy is calling for a 0.6% decline in March's retail numbers, largely as a result of weak vehicle sales.
Financial Post- May 17, 2010