Thursday, June 19, 2008

Rising Fuel Prices Focusses Bank of Canada on Inflation, Interest Rates to Hold or Rise

Hi All,

I filled up my car yesterday and was shocked to see premium fuel selling for $1.69!!!

That's huge! I usually don't worry about the fuel price as my predilection for high performance cars makes concerns futile, but I was shocked and the increase in fuel prices hit home.

The Bank of Canada pays attention to inflation and the increase in fuel prices has a huge knock on influence as everything we consume is moved by vehicles using fossil fuels. At some point the run up in fuel costs begin to bite and thats when the Bank of Canada is going to be forced to raise rates.

A rise in rates is not necessarily a good thing for Vancouver Real Estate in the short term, but high fuel prices are good for Vancouver Real Estate in the medium term.

This is the reason. High fuel prices focus peoples minds on the costs of less efficient forms of transportation (single occupant cars) and encourages them to use more efficient forms of transportation (walking, public transit, bikes, etc) OR even better encourages them to move into the City! So overall in the medium term (in the long term we are all dead) high fuel prices are good for Vancouver real estate and good for the environment.

Inflation rises to 2.2% in May

Globe and Mail Update

Soaring gasoline prices sent the Consumer Price Index in May to its sharpest monthly increase since January, 1991 – the month the goods and services tax was introduced in Canada.

Year over year, consumer prices rose 2.2 per cent in May, primarily because of higher gasoline prices, which were up 15 per cent from May, 2007, Statistics Canada said Thursday.

The increase exceeded expectations, “which gives a good idea why the Bank of Canada is suddenly becoming much more focused on headline inflation readings,” said Douglas Porter, deputy chief economist at the Bank of Montreal.

The core inflation rate, which strips out the most volatile items such as gasoline and is normally used by the Bank of Canada to monitor the inflation control target, rose 1.5 per cent between May, 2007, and May, 2008, identical to the 12-month increase posted in April.

“While core is still well below the bank's 2 per cent target, it's doubtful they will take much comfort from that fact, with rampaging energy prices clearly threatening broader inflationary expectations,” Mr. Porter said in a research note.

Many economists had been expecting a year-over-year increase of 1.9 per cent, up from 1.7 per cent in April, according to a Reuters poll.

Higher mortgage interest costs, higher house prices and higher food costs all contributed to the increase, Statscan reported.

Canadians paid 1.9 per cent more for store-bought food items, compared with the same month last year, up from the 0.9 per cent posted in April.

“Prices for bakery products increased 13.2 per cent, the fastest 12-month rise since October, 1981,” Statscan said.

The CPI, always a closely-watched economic measure, took on added significance Thursday in the wake of the Bank of Canada's decision last week to hold steady on interest rates because of concerns about inflation. The Bank of Canada said in a statement on June 10 that if current levels of energy prices persist, “total CPI inflation will rise above 3 per cent later this year.”

The central bank's stance has set off considerable debate among economists, who were expected to closely monitor a speech by Bank of Canada Governor Mark Carney on Thursday night in Calgary to gain some clearer insights into his thinking.

In a research note, Toronto-Dominion Bank economist Charmaine Buskas said energy prices clearly played a big role in pushing the overall inflation rate higher.

“Core prices, however, were in line with expectations, rising … 1.5 per cent year over year,” she wrote.

Mr. Porter said “there are signs that the persistent run-up in energy prices is beginning to spill into other goods, although gasoline is still the primary source of inflationary pressures…

“Given today's result, a 3 per cent [year over year] reading as early as June is not out of the question (as prices fell last June),” he wrote.


Toronto real estate agent said...

Hi Mike,
Very nice subscription. I am working as a Toronto real estate agent so I am driving car a lot. Car is a necessity to do my job efficiently and that is why I did not care about the price. But now, price is so high that I am thinking about alternative ways how to care about my customers. I am sure that there is a way, just look into Europe where the price is almost 3dollars.

Mike Stewart a Downtown Vancouver Realtor with Century 21 In Town Realty said...

Hi Eli,

I am a Downtown Vancouver Realtor and I drive very little. Downtown Vancouver is so dense that I am able to walk to most of my appointments. I drive quite a thirsty car, yet I takes me two to three weeks to burn a tank of gas. What areas of Toronto do you focus on?

Thanks for your comments!