Retail prices are picking up as demand improves, Toronto-Dominion Bank says in an interesting new study that examines the relationship between the Canadian dollar and inflation.
The loonie is sitting at about 1 per cent below its 2008 peak, while prices for goods excluding food and energy are 0.5 lower, economist Diana Petramala says.
"The recession stripped retailers of their pricing powers, and as a result they could not pass the sharp depreciation of the Canadian dollar, which increased import costs during 2008-2009, on to consumer prices," Ms. Petramala writes.
Her study finds that, on average, a 1-per-cent swing in the loonie, be that appreciation or depreciation, leads within six to nine months to a 0.4-per-cent increase or decrease in the price of those goods.
But noting the difference in the relationship between the dollar and inflation for such goods now, she says, "we believe that the sharp acceleration in this component of the CPI is a reflection of retailer prices picking up as demand has improved over the last year of the economic recovery."
In the future, Ms. Petrama notes, the cost of these goods will likely be governed by the slack in the economy, rather than the swings in the loonie. And that, she adds, will allow the Bank of Canada to keep interest rates on hold.
"The bottom line is that the Canadian dollar matters significantly for the inflation outlook, particularly over the medium-term" she says. "And, should inflation pressures brew on the domestic front, a strong Canadian dollar could act as buffer giving the Bank of Canada some breathing room with monetary policy. For now, however, the Canadian dollar does not pose a risk to our inflation outlook."
Consumer prices climbed 2.4 per cent in October, while core inflation, which strips out more volatile items, rose 1.8 per cent.