Sunday, August 17, 2008

RBC comments on Inflation concerns rising, while downside risks to growth persist

Inflation concerns rising, while downside risks to growth persist

The Fed and the Bank of Canada have become more vocal about worrying signs of a pick-up in inflation, pointing to the persistent rise

in energy prices. However, worries about the U.S. economy also linger, with the housing recession in full swing, consumer confidence

deteriorating and the unemployment rate at its highest level in 3-1/2 years. In Canada, second-quarter data are suggesting that the

contraction in first-quarter real GDP was an one-off event, although the weak state of the U.S economy is keeping the downside risks

to the export outlook intact. Our view is that the strong headwinds facing the economy will be enough to keep both the Fed and the

Bank of Canada on the sidelines this year, especially if energy prices start to decline as we expect and take some of the heat off the

headline inflation rate.

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