Inflation Falls in Canada, New Zealand, and the UK

Canada, New Zealand, and the UK all reported lower inflation this week, as aggressive rate tightening by central banks has slowed economic activity and cooled inflation.

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Canada’s Consumer Price Index (CPI) dropped to 2.8% year-on-year in June, down from 3.4% in May and below the consensus forecast of 3.0%. This was the lowest level since March 2021.  The average of two of the Bank of Canada’s (BOC) core measures of inflation came in at an average of 3.8% in June, a tick lower than the May reading of 3.9%. Core CPI excludes food and energy items and is considered more important than headline CPI.

The good news is that inflation has finally dropped to within the Bank of Canada’s target range of 1%-3%. However, core CPI has been more persistent than expected and remains above the target range.

The BoC raised rates last week by 0.25%, bringing the benchmark cash rate to 5.0%. The central bank would like to pause hiking at the next meeting in September, but that will depend on key economic data, particularly inflation and employment. The money markets are expecting a pause in September and have priced in the probability of a rate hike at 20%.

New Zealand CPI, which is released quarterly, fell in the second quarter to 6.0% year-on-year, down sharply from 6.7% in the first quarter but a notch above the consensus of 5.9%.  This was the lowest reading since Q4 2021. On a quarterly basis, CPI dipped to 1.1% in Q2, down from 1.2% in Q1. Food and housing were the main contributors to inflation.

Inflation is moving in the right direction but remains well above the Reserve Bank of New Zealand’s (RBNZ) target of 2%. The central bank has hiked by 525 basis points in the current rate-tightening cycle but may need to tighten further in order to bring inflation closer to target. The RBNZ meets next on August 16th.

The UK, which boasts the highest inflation of any G-7 country, finally had something to cheer about today, with a better-than-expected inflation report. In June, CPI fell to 7.9% year-on-year, sharply lower than the 8.7% gain in May. Core CPI declined slightly to 6.9%, down from the May reading of 7.1%, which was a 31-year high.

The drop in headline inflation is certainly encouraging, but the core rate has proven to be stickier than expected, and the Bank of England likely will have to continue raising rates in order to bring down inflation closer to its 2% target.

In the Forex market, the positive inflation reports sent the Canadian dollar slightly higher but pushed the New Zealand Dollar and British Pound lower.

The Canadian Dollar against the US Dollar posted modest gains on Tuesday.

The New Zealand dollar against the US Dollar declined as much as 100 pips following the inflation report but has pared most of those losses.

The British Pound against the US Dollar is down by 80 pips on Wednesday.

The benchmark Canadian index, the S&P/TSX, rose 149.78 points on Tuesday (0.74%), closing at 20,376.57.

In the UK, the FTSE 250 Index has soared by 548.81 points (2.95%) on Wednesday.

In New Zealand, the S&P/NZX 50 is up 0.10% at 11,945 on Wednesday.

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