Inflation dips on cheaper gas, but core prices rise

TAVIA GRANT

Globe and Mail Update

The annual rate of inflation matched its lowest point in two-and-a-half years last month as consumers paid much less at the pumps. Core prices, however, unexpectedly rose.

September consumer prices eased to a 0.7-per-cent pace, matching the lowest since March, 2004, Statistics Canada said Friday. Gasoline prices fell 18.7 per cent from last year, the sharpest drop in almost five years after Hurricane Katrina sent prices to a record last year.

The central story in today's report lies in the so-called core rate of inflation, which strips out the eight most volatile items in the index. That rate, seen as a more reliable indicator of future inflation, unexpectedly quickened to 1.7 per cent from 1.5 per cent. Stripping out the effect of the GST cut, the rate hit 2.2 per cent.

The report comes a day after Bank of Canada governor David Dodge sounded an alarm bell that inflation may heat up.

“The big story here is the move in core inflation to above 2 per cent, a lot earlier than the Bank (of Canada) expected,” said Douglas Porter, senior economist at BMO Nesbitt Burns Inc. “Let's just say that their warnings on the inflation dangers are bound to grow a lot louder in the months ahead, even if growth remains disappointing.”

The main reasons behind the increase in core inflation were higher homeowners' replacement costs, electricity prices, automobiles and restaurant meal prices.

Among provinces, the annual inflation rate remained the highest in Alberta, at 3.7 per cent, and was the lowest in New Brunswick, where consumer prices fell 0.3 per cent.

Gasoline prices fell the most since December, 2001, Statscan said, as Hurricane Katrina limited supplies last year, and rising inventories sent prices lower this fall.

“Gasoline plunged this September, but it also captures the fact that a year ago, last September, gasoline prices were headed in the exact opposite direction after...Hurricane Katrina,” said Warren Lovely, an economist at CIBC World Markets Inc., before the report was released. “Both influences are contributing to a big, significant decline in that year-over-year rate.”

Prices fell, meantime, for computer equipment and supplies and men's clothing.

On a monthly basis, consumer prices posted a 0.5-per-cent decrease after a 0.2-per-cent increase in August as gasoline prices fell a record 17.4 per cent in the period.

Economists polled by Bloomberg had expected an annual rate of 0.9 per cent after 2.1 per cent in August and a core rate of 1.5 per cent.