The highlighted elements of first reports on today's Consumer Price Index release are the reductions in year-over-year headline and core inflation. But the underlying trends suggest that core inflation -- to which the Bank of Canada pays special attention -- may well drift further above the 2 per cent target in the near term.
Some of the increase is "baked in" the year-over-year inflation numbers: core inflation rates over the past 3-6 months have drifted above 3 per cent. As long as this persists, the annual averages will be dragged upwards.
Another factor to consider is that the base periods for the year-over-year numbers are CPI data from 12 months ago, so what was happening then is -- at least, as far as the arithmetic is concerned -- as important as what is happening now. And 12 months ago, we were entering a brief period in which core CPI grew hardly at all: an annualized inflation rate of only 0.5 per cent between October, 2010, and February, 2011. The next few year-over-year inflation statistics are going to be calculated from a low base.
Inflationary pressures may also turn out to be stronger than the Bank of Canada anticipated in its most recent Monetary Policy Report. The forecast of 2 per cent GDP growth in the third quarter already looks to be low. And the surprisingly good recent news from the U.S. may mean that fourth-quarter GDP growth rate may come in above the MPR's forecast of 0.8 per cent.
So we shouldn't be surprised if core inflation goes further above target over the next few months. Then again, as long as there is a non-negligible risk that events in the euro zone may provoke a global financial crisis, neither should we be surprised if the Bank of Canada doesn't respond.