Tuesday, September 19, 2006

Inflation rate eases


Globe and Mail Update

Canada's inflation rate eased to a 2.1-per-cent annual rate in August as gasoline-price increases slowed, confirming expectations that interest rates are unlikely to budge for the rest of the year.

It's the third month in a row that the rate dropped, marking the longest such stretch in two years, Statistics Canada said Tuesday. The consumer price index eased after rising at a 2.4-per-cent pace in July.

The report, which came in largely as expected, confirmed expectations that the Bank of Canada won't move on the interest-rate front this year, economists said. The central bank has held its key lending at 4.25 per cent in both of its last two decisions on expectations a weaker U.S. economy will moderate domestic growth.

“With the economy operating right at potential, core inflation right on target, and interest rates at neutral, it's going to take a major surprise to push the (central) bank off the sidelines at this point,” said Douglas Porter, deputy chief economist at BMO Nesbitt Burns in a note.
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Tuesday's inflation numbers confirmed that the Canadian economy is divided along regional lines. Alberta's inflation rate hit a three-year high of 4.7 per cent in August, more than double the national average, from a 4.3-per-cent pace in July.

“Understanding Canadian inflation, it increasingly seems, requires merely looking at where you live,” said Warren Lovely, an economist at CIBC World Markets Inc., in a report. “Are you making a living in Alberta, where it's difficult to exaggerate the speed with which home prices are rising, or are you settled in Central Canada, where price gains are more controlled?”

Homeowners' replacement costs, for example, soared 43.4 per cent in Alberta in August. By contrast, the sub-index, which measures the worn-out structural portion of housing and is estimated using new housing prices, was up around 4 per cent in other large provinces such as Ontario, Quebec and British Columbia.

Homeowners' replacement cost index, rose 8.1 per cent in August from a year ago and has risen every month since December. This sub-index accounts for a large share of the total consumer price index basket and is one factor pushing Canada's inflation rate higher.

National gasoline prices were 9 per cent higher this August than last year, a more modest increase after a 16.1-per-cent increase between July of this year and last year.

Other prices that rose included mortgage interest costs and electricity prices.

The range of replacement costs varied substantially from province to province. “By all counts, Alberta's housing sector stands out clearly from that of the other provinces,” Statscan said. “The boom in the oil sector, combined with a high employment rate and a high degree of consumers' confidence, translated into a surge in demand for new houses in that province.”

Mortgage interest costs swelled as the value of new properties increased and interest rates rose.

Electricity prices also climbed as Ontario, Alberta, Quebec and British Columbia saw price hikes.

Those price increases were offset by lower prices for computer equipment and supplies, women's clothing, video equipment and natural gas, Statscan said.

The index for computer equipment and supplies has plunged 18 per cent from a year ago, while video equipment is down 11.6 per cent.

“Although consumers only occasionally purchase these products, they exert an important influence in reducing upward price pressures,” the report said.

Stripping out the effect of the cut in the goods and services tax, overall inflation would have been up 2.6 per cent in August, a slower rate than the 2.9 per cent pace in July, according to Ted Carmichael, chief economist at J.P. Morgan Securities Canada Inc.

The core rate, which excludes the eight most volatile items in the index, was unchanged at 1.5 per cent. This index, closely watched by the central bank as a sign of underlying price changes, has remained stable over the past year, Statscan said.

On a monthly basis, prices paid by consumers rose 0.2 per cent in August, “largely as a result of pressures from the housing sector,” the report said.

Analysts polled by Bloomberg News had expected a 2.1-per-cent annual rate and a core rate of 1.5 per cent.

The Bank of Canada makes its next interest-rate decision on Oct. 17.

The Canadian dollar traded at 89.19 cents (U.S.) after the report, down from yesterday's close of 89.45 cents.

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