Economics
Rising gasoline prices power surge in inflation rate
Latest available: June 2008
Release date: July 23, 2008
Canada's all-items inflation rate jumped to 3.1% in June, higher than market forecasts of 2.9%, to the fastest pace of increase since September 2005. The Bank of Canada's core inflation rate, CPIX, was 1.5%, slightly lower than the expected 1.6%.
The surge in the all-items inflation rate largely reflected a 26.9% rise in gasoline prices during the past 12 months. The big increase packed an even bigger punch because it came on top of a 4% decline in gasoline prices in June 2007. Excluding gasoline, consumer prices were 1.8% higher than a year earlier, up from May's 1.6%.
On the month, the all-items index rose 0.7% in June relative to May, faster than market forecasts for a 0.5% increase while the CPIX rose an as-expected 0.1% on the month. The monthly increase in the all-items index reflected higher energy prices with gasoline costs rising 5.8% and natural gas prices up 8.2%. Air transportation costs posted another hefty 6.7% gain on the back of May's 5.4% increase. Prices for food posted a solid 1% rise with fresh vegetable prices rising 6.1%. Lower prices for passenger vehicles (-0.5%) and men's clothing (-4.6%) had some moderating effect on the monthly change.
On a year-over-year basis, the biggest contributor to June's 3.1% rise was gasoline prices which stood 26.9% higher than in June 2007, a pick-up from the 15% year-over-year increase in May. Prices of other fuels also firmed, jumping 49.3% relative to a year earlier, the same rate as in May. Mortgage interest costs contributed to May's stronger-than-expected annual rise and were up 9%. Once again, homeowners' replacement costs posted a slightly slower pace of increase and were up 3.2%. Mitigating some of the impact of the price increases were lower prices for the purchase and lease of passenger vehicles (-8.4%), as manufacturers gave incentives on new models, with computer equipment prices posting a 13.2% decline.
Normally, a steady streak of higher inflation rates would be met with a resounding call that the Bank of Canada would raise interest rates. However last week's Monetary Policy Report Update silenced calls that the Bank would shift into rate hike mode as the Governor highlighted that the best predictor of the all-items inflation rate in the medium-term is movement in the core and today's report showed that the core rate stayed in the lower end of the range during the past year at 1.5% in June.
The Bank of Canada forecasts that the core inflation rate will remain below 2% through early 2009 as the growing slack in the economy contains the pick-up in core prices. Going forward, the Bank will remain wary about the impact of the rise in the headline rate on inflation expectations, which were characterized as "well anchored" in the central bank's July Report. Despite the somewhat hotter inflation environment, forecasts (both RBC and the Bank of Canada) that the economy will grow at a slower-than-potential rate suggest that the Bank will hold the policy rate at 3% for the remainder of the year.
Producer prices rise again on the back of rising energy prices
Latest available: May 2008
Release date: June 27, 2008
I
ndustrial product prices rose 0.6% in May, one-half the pace expected by market forecasts who estimated a 1.2% rise. Higher prices for petroleum and coal products (+8.2%) were mainly responsible for May's increase. Excluding petroleum and coal products, the index fell 0.5%. Relative to a year ago, the IPPI was up 2.4%, faster than April's 1.4% gain. The raw materials price index rose 3.1% in May and was 27.1% higher than a year earlier.
Prices of 13 of 20 non-energy components in the index declined in May, with primary metals and motor vehicle products and other transportation equipment posting the largest declines. The impact of the appreciation in the Canadian dollar eased price pressures in the IPPI this month, making the prices of U.S. dollar-denominated goods cheaper and trimming 0.4 percentage points from the monthly rise.
The persistent rise in energy prices continues to pressure headline inflation rates higher. With crude oil hitting another record high overnight, these upward pressures are showing no signs of abating. However, the increase in prices in May shows that these increases were very highly concentrated and that, outside of energy, prices declined on average. The strong Canadian dollar is also limiting the pace of increase as the annual increase would have been 4.8% instead of 2.4% if the currency had not rallied during the 12-month period.
The Bank of Canada has shown heightened concern about the inflation outlook, stating that if the recent spurt in energy prices persists "total CPI inflation will rise above 3 per cent later this year" and that the balance of risks to the inflation outlook had shifted "slightly to the upside." With the economy having slipped into excess supply in the first quarter on the back of the unexpected contraction in GDP growth, the Bank sees some risks to the inflation outlook as well and will likely keep the sidelines and hold the overnight rate at 3%.
