Tuesday, August 22, 2006

Canadian inflation rises unexpectedly

Canadian inflation rises unexpectedly


Globe and Mail Update

Higher gas costs helped boost Canadian consumer prices by 0.1 per cent in July, despite a one percentage point reduction in the goods and services tax that took effect at the beginning of the month.

The GST change was estimated to have cut overall prices by about 0.5 per cent, so inflation is actually up fairly sharply in the month. Any tax savings were “more than eaten up by higher underlying prices for some key goods and services,” said Warren Lovely, a senior economist at CIBC World Markets Inc.

Increases in energy costs were particularly steep, with the price of gasoline rising 4.6 per cent in July. Fresh fruit was also a contributor, with prices jumping 7.4 per cent between June and July.

The monthly inflation rate was considerably higher than most economists had predicted. The consensus forecast was for a 0.3 per cent drop in the July rate.

But economists said the higher-than-expected numbers are not enough to get the Bank of Canada to change its policy on interest rates, which are on hold for the time being.

The year-over-year inflation rate fell slightly, to 2.4 per cent in July, compared to 2.5 per cent in June and 2.8 per cent in May, Statistics Canada said in its release Tuesday morning.

The annual inflation rate was strongly affected by energy prices, with gasoline up 16.1 per cent from a year earlier. In some provinces, the cost of gas rose even faster — Saskatchewan residents paid 19.2 per cent more in July of this year than they did in the same month of 2005.

Electricity prices also climbed sharply in the year, by 6.3 per cent.

On the other side of the coin, prices of computer equipment and supplies dropped more than 17 per cent over the year, and video equipment fell more than 11 per cent. Men's clothing prices fell 3.7 per cent year-over-year, while women's clothing dropped 3.4 per cent.

Alberta showed the highest yearly increase in CPI, at 4.3 per cent.

Core inflation, which excludes the eight most volatile items in the index — including fruits, vegetables and energy — was at 1.5 per cent on an annual basis, down from 1.7 per cent in June.

Economists noted that the most of the upward pressure on inflation is coming from non-core items.

With the core inflation rate fairly stable, the Bank of Canada is unlikely to change its stance that interest rates hikes are at an end, said Adrienne Warren, senior economist at Bank of Nova Scotia. “The Bank of Canada is pretty firmly on hold for the time being.”

Evidence that Canadian economy activity has some weaknesses — such as Monday's soft retail sales figures — will balance any concerns over rising inflation, she said.

Still, Ms. Warren said, “rate cuts, for the time being, are not forthcoming.

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