Stable energy costs boost inflation

Inflation in Canada increased to 2.1% in April, thanks to fewer fluctuation in energy costs.

May 22, 2012   by The Canadian Press

OTTAWA: Inflation in Canada appears to have entered a period of stability near the Bank of Canada’s 2% sweet spot, providing little impetus for interest rate hikes any time soon.

Statistics Canada said last week annual inflation edged up one-tenth of a point to 2% in April, while the core, underlying price measure rose two-tenths to 2.1%.

The big surprise is that energy costs—the major cause of volatile price fluctuations for several years—all but disappeared as a driver in April.

Spurred by fluctuations in energy and gasoline prices, the inflation rate has dipped as low as one per cent in June 2010 an climbed as high as 3.7% last May.

For the first time since October 2009, energy costs in April rose at a lower rate than the overall index with a tiny 1.1% increase from last year.

Statistics Canada noted that gasoline had been rising in recent months, pushing April’s gasoline index to its highest level since July 2008, but that on a year-to-year basis, the increase was the smallest since September 2010. That’s because gasoline prices hit near record levels last April, it said.

“It does look like two per cent is doable this and probably next year,” said Bank of Montreal economist Doug Porter. “If find it interesting that there is some underlying strength in core inflation, but I don’t think it’s enough to be concerned about at this stage.”

Porter noted the bump in gasoline in April from March, but points out that is already yesterday’s news as this month has seen pump prices drop along with global oil prices, a turn that will be reflected in the May data.

TD Bank’s Leslie Preston said Bank of Canada governor Mark Carney can make an argument for a modest hike in interest rates, given that the overnight rate has sat at the super-stimulative one per cent level since September 2010.

For the second consecutive month, average wage increases are now running slightly above inflation at 2.3%—although in Ontario they are at 0.7%. As well, Canada has enjoyed the best two months of employment growth in three decades, with about 140,000 jobs added in April and May. Other economic data also point to growth in the first quarter.

But the elephant in the room on any discussion on interest rates is the turmoil going on in Europe and that Canada could again be sideswiped by a financial crack-up outside its borders.

“With so much uncertainty still looming in the global economy, the Bank can afford to take its time, and undertake only modest hike rates over the next two years,” said Preston.

Many analysts still believe the central bank won’t move until at least early next year.

The commodity-sensitive loonie fell 0.17 of a cent to 97.96 cents US, its lowest close since Jan. 13.

Economist Erin Weir of the United Steelworkers advised Carney to keep his focus more on the exchange rate than inflation.

“While the loonie trades for about 98 US cents on financial markets, the OECD calculates that its real purchasing power is equivalent to only 76 US cents. This discrepancy hurts manufacturing and other industries that export output abroad, but buy inputs in Canada,” he explained in a note.

On a monthly tracking, consumer prices rose 0.4 per cent in April from March as the cost of gasoline increased by 3.2% in a month. It was the fourth consecutive time that prices have risen by the same amount on a monthly basis.

Regionally, inflation was highest in Newfoundland at three per cent and lowest in Alberta, where the annual rate dipped to 0.8% on falling costs for electricity and natural gas.

In April, prices rose year-over-year in all eight of the major groups that Statistics Canada tracks, led by transportation, which increased by 3.4%, and food, which cost 2.5% more.

Other major contributors to inflation included the price of passenger vehicles, 3.4% higher than last year, and gasoline, up 3.3%.

As well, household operations, furnishings and equipment rose 2.6%, clothing and footwear increased 2.4%, car insurance costs were up 3.6%, and shelter costs edged up 1.1%.

With energy removed from the equation, Porter noted there was no major driver of inflation evident in the report.

There were some big outright declines in the prices. Natural gas fell 13.9%, fresh vegetables 9.9%, video equipment 12.8%, and computer equipment, software and supplies decreased 6.6%.

©The Canadian Press

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