Inflationary Pressures not as great as Bank Of Canada fears

For those of you on variable mortgages, looks like your payments are going to go down some more over the next year. The Bank of Canada uses Inflation to make its rate decisions and most commentators are suggesting Inflation should continue to stay low. This is good for Vancouver Real Estate. BC and Vancouver's economy is still in good shape from high natural resources prices and with rates coming down, look for more fuel for Vancouver's real estate market.

Inflation? New reports suggest otherwise

HEATHER SCOFFIELD

Globe and Mail Update

June 11, 2008 at 9:39 AM EDT

OTTAWA — Inflation? What inflation?

A day after the Bank of Canada said it would no longer be cutting its key interest rate because it was bracing for significant inflationary pressure, two new indicators released Wednesday suggest that what little heat there was in the Canadian economy is actually abating.

The new housing price index, which feeds into the much-watched consumer price index, slid significantly in April. Prices for new homes rose 5.2 per cent between April 2007 and April 2008, the slowest pace in more than two and a half years.

And more slack opened up in the industrial sector in the first quarter too. Industries were operating at just 79.8 per cent of full capacity during the first three months of the year, marking the lowest level in 15 years.

Both indicators suggest inflation is benign for now, despite soaring commodity prices and growing fears among the world's central bankers that they are on the brink of an inflation problem.

“Disinflation evidence shines through in two Canadian releases today that shed doubt on inflation fears in Canada,” said Derek Holt, economist at Bank of Nova Scotia.

He thinks the central bank will have to reconsider its decision to end its rate cuts. Since inflation is not much of a threat in Canada and the economy seems to be weakening, the Bank of Canada will have to return with more cuts later this year, he said.

The slide in the new housing price index is more proof that the housing market is cooling off in Canada, economists said.

“The report adds to the growing body of evidence that indicates that the Canadian housing sector may be coming off the boil,” said Millan Mulraine, economics strategist at TD Securities.

And the cutback in capacity use in the industrial sector is “further evidence of the retrenchment in economic activity in Canada,” he added.

But Tuesday, the Bank of Canada said it had already done enough to help the stagnant economy, and was now joining the rest of the world in focusing instead on keeping inflation under control.

The central bank aims to keep inflation at a 2 per cent pace, but price increases have been running below that level lately. In April, total annual inflation was 1.7 per cent and core inflation, which excludes volatile prices, was 1.5 per cent.

The Bank of Canada normally pays more attention to core prices, which it has said will remain below 2 per cent for the long term. But it is clear that the central bank has now switched to focus more on total inflation and is worried about the effect of soaring energy prices.

The bank warned that if energy prices stay high, total inflation will rise to about 3 per cent.

Plus, in a separate report, Bank of Montreal is warning that the disinflationary pressure from the strong dollar appears to be coming to an end. The strong dollar has prompted some retailers to cut the prices on some imported goods, especially cars.

But other prices don't appear to be falling to reflect a cheaper import price.

“Looking at a broad basket of items, we find that while there has been some movement in the past year, the price gap remains extraordinarily large, and there are plenty of signs to suggest that the bulk of the discounting is over,” said Douglas Porter, deputy chief economist at BMO Nesbitt Burns. “In other words, without further pressure, this may be as good as it gets for Canadian shoppers.”