Economists from Scotia Capital agree with the Bank of Canada's view that headline inflation should move higher towards the end of this year and in the next, partly on the back of the unwinding of the GST cut in January. "Core inflation, however, should remain relatively well-anchored. Energy will likely remain the largest contributor to headline inflation as crude oil moved up almost 10% in June. However, continued gains in mortgage interest costs and food prices will also put upward pressure on inflation.

"Nonetheless, offsetting pressures from the strong Canadian dollar - which we expect will strengthen even more going into next year compared to the U.S. dollar - and its impact on import prices will help keep increases in core CPI relatively muted. Auto prices will also likely continue to fall on a year-over-year basis. All in all, even though we will likely see a large jump in headline CPI to 3.0% in June, Canadian headline inflation is still much below the U.S. which just posted 5.0% year-over-year in June," wrote economists from Scotia Capital.

Krishen Rangasamy from CIBC World Markets expects energy prices to propel inflation further. "The Bank of Canada is suggesting that the inflation rate will peak at 4.3% in the first quarter of 2009 based on stabilization in energy prices. This contrasts with our view that energy prices will be rising further, with oil averaging $150 next year and $200 in 2010. With higher energy prices spilling into prices of non-energy goods, rising food costs, and the disappearance of the restraining effect of the 2008 GST cut on prices, the Bank will have a huge challenge in 2009. Given the downside risks to the economy, we do not see imminent rate hikes on the table, but if the Bank is to stick to its forecast of a 4.3% peak in the CPI, an increase in the overnight rate of at least 100 basis points is warranted next year," Rangasamy wrote.

Gian Espejo, senior dealer at GCI Financial Ltd, said, "BOC policy-makers would need a string of higher consumer inflation prints and a strong indication that long-term inflation expectations have become less anchored before accelerating the return to a contractionary monetary policy. In its recent Monetary Policy Update, BOC indicated total CPI inflation is likely to move above its 4.00% target and peak in Q1 2009 before moderating to 2.0% in H2 2009. Stronger Canadian inflation would see BOC move closer to a hike. A move higher in rates is likely by the end of the year, especially if global inflation rates remain elevated."

All times in EDT

7:00 CA Consumer Price Index (M/M) June Exp: +0.5% Prior: +1.0%

7:00 CA Consumer Price Index (Y/Y) June Exp: +2.9% Prior: +2.2%

7:00 CA Bank Canada CPI Core (M/M) June Exp: +0.1% Prior: +0.3%

7:00 CA Bank Canada CPI Core (Y/Y) June Exp: +1.6% Prior: +1.5%

7:00 US MBA Mortgage Applications 18-July Prior: +1.7%

9:00 US Fed's Mishkin Speaks at Bank of Canada Conference

10:30 CA Bank of Canada will auction $2B in Cash Management Bill

10:35 US DOE U.S. Crude Oil Inventories W/E July 18 Exp:-600K Prior: +2952K

10:35 US DOE U.S. Gasoline Inventories W/E July 18 Exp: +200K Prior: +2472K

10:35 US DOE U.S. Distillate Inventory W/E July 18 Exp: +2500K Prior: +3189K

10:35 US DOE U.S. Refinery Utilization W/E July 18 Exp: 0.0% Prior: +0.33%

10:35 US DOE U.S. Cushing OK Crude Inventory W/E July 18 Prior: -540K

11:15 US Fed's Kohn Speaks on Transparency at Bank of Canada Conference

13:00 US Treasury to Sell $31B in 2-Year Notes

14:00 US Fed's Beige Book

By Steve Stecyk, This email address is being protected from spam bots, you need Javascript enabled to view it , edited by Cristina Markham, This email address is being protected from spam bots, you need Javascript enabled to view it

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