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Upside risks growing for core inflation

Firms’ selling price expectations rose further in July and are now higher than before the lockdown started in March, which seems to suggest that an average of the Bank of Canada’s three core inflation measures is more likely to rise than fall further, despite elevated unemployment and still-depressed economic activity. Admittedly, firms’ selling price expectations are currently consistent with core inflation rising from 1.6% in July toward 1.8% at most. Moreover, it is likely that inflation for many things that firms do not directly set, such as housing rents and mortgage interest costs, will continue to decline for most of the rest of 2020. That could prevent core inflation from picking up in the short run. But with the government announcing last week that it is extending income support for households well into 2021, and firms facing higher costs as a result of the pandemic, the balance of risks to our forecast that core inflation will remain below 2% until 2023 now lie to the upside.

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