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Analysts at Capital Economics now expect inflation to surpass the upper limit of the Bank of Canada’s 1% to 3% range for most of the rest of the year. Still, they continue to think that inflation will drop back to less than 2% in 2022.

Key Quotes:

“The focus has been on US inflation this week and, after the upside surprise in April, we now expect inflation there to be above 4% for much of the year. Similar price pressures will be evident in Canada as the economy re-opens, but there are two key reasons why inflation is unlikely to rise by as much.”

“The view of policymakers on both sides of the border, that the rise in inflation will be transitory, looks more justified in Canada. The exchange rate plays a larger role in determining inflation and the rise in the loonie, which is up by 15% y/y against the USD, will soon put downward pressure on goods inflation.”  

“With the loonie acting as a pressure valve and little sign that wage growth will take off, we expect both headline and core inflation to drop to less than 2% in 2022. This implies inflation will be below 2% again by the time the Bank’s conditions for raising interest rates have been met,”

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