187
Inflation in Canada was thriving in grocery stores and gas stations across the country in August, pushing the consumer price index to its highest point since March, 2003.
“While inflation is finally starting to ebb in much of the industrialized world, Canada is suddenly swimming against the tide,” said Douglas Porter, deputy chief economist at BMO Nesbitt Burns.
Consumer prices rose 3.5 per cent in August from a year earlier, pushed higher by a 26.3 per cent increase in gasoline, and a hefty 5.2 per cent increase in food from stores, Statistics Canada said.
But economists had widely expected a high number for total inflation in August, mainly because gas prices a year ago were falling, and the year-over-year comparison automatically makes for a high number.
Higher gasoline prices in August pushed the inflation rate to 3.5 per cent
Related Articles
More telling are some of the month-over-month trends which show that gasoline prices have come off their highs of July, but the prices of food and some services are on the rise.
Overall, consumer prices declined 0.2 per cent in August compared to July. That's the number markets were watching and hoping for as a sign that inflationary pressure might be abating somewhat.
But on a seasonally adjusted basis, prices rose 0.2 per cent.
Core inflation, which excludes the most volatile prices such as energy and some food, was 1.7 per cent in August from a year earlier – faster than the 1.5 per cent increases in the four preceding months. Economists had expected a more benign 1.5 per cent increase in core inflation.
The Bank of Canada watches core inflation closely, and uses interest rates to keep core inflation close to 2 per cent.
On a monthly basis, the core index rose 0.3 per cent (both seasonally adjusted and unadjusted) – again higher than analysts' expectations.
“The Canadian economy is struggling, but as anyone who lived through the ‘70s remembers, that doesn't bring an automatic or immediate cure for inflation,” CIBC economist Avery Shenfeld said in a note to clients entitled: Canadian Inflation: Not Dead.
On a year-over-year basis, the main pressure on consumer prices was gasoline prices, which were a whopping 26.3 per cent higher in August than a year earlier. Other fuel prices were up as well, and overall, energy prices were 20.2 per cent higher.
Excluding energy, the consumer price index rose 1.8 per cent from August, 2007 – higher than the 1.6 per cent pace noted for July.
Consumers probably didn't feel like energy prices were higher in August, however. That's because compared to a month earlier, energy prices fell a relatively large 3 per cent.
Gasoline was down 6.6 per cent compared to July.
As has been the pattern in Canadian prices since the spring, food costs also rose in August, up 4.5 per cent on the year, and up 0.3 per cent on the month.
Excluding restaurant food, the price of food from stores rose 5.2 per cent from a year ago – the largest leap since June, 2001, Statscan said. That's because bakery and cereal products continued to surge, rising 14.9 per cent year over year.
Lower prices for cars and women's clothing helped offset the rises in food and energy, Statscan said. Auto prices have fallen for 14 months in a row, but their dampening effect on inflation is tapering, economists noted.
Shelter costs rose 5.3 per cent from a year ago, but this rise was not nearly as big as the leaps in shelter costs earlier this year.
Expect volatility in the months to come, as gasoline and fuel prices bounce around, and the effects of anomalies from last year's price patterns - such as the cut to the Goods and Services tax and price discounting as the Canadian dollar reached par with the U.S. dollar - fade away, said Mr. Porter.
“Don't look for any quick retreat in Canadian headline inflation in the next few months. Amid all the day-to-day swings, it looks like gasoline prices are actually set to rise on average for September,” he warned.
But over the medium term, inflation pressure should abate, economists said. That's because the U.S. economy is slowing, wage growth in Canada is not as strong and the housing market here has flattened, Mr. Porter said.
“I think inflation will abate in the year ahead. But it will be uncomfortable for the next few months.”
While oil prices have soared this week, they're still lower than in July, Mr. Shenfeld noted.
“In the face of these readings, which are very troublesome on the surface, there are some grounds for optimism,” echoed Dale Orr, chief economist at Global Insight Canada. “Given the recent and continuing expected weakness in energy prices, there is good grounds to expect inflation to fall towards the two per cent level, perhaps by mid next year.”
Still, the Bank of Canada does not have as much room to cut rates right now as market players expect, economists added.
“The Bank of Canada is secretly welcoming a period of sluggish growth” in order to bring down inflation, Mr. Shenfeld said.
