Consumers paid less only for shelters

Canada’s consumer prices rose by 3.7 per cent in the 12 months leading up to May. This increase was well above all 24 forecasts in a Bloomberg survey of economists and far above the Bank of Canada’s 2.0 per cent target, according to Statistics Canada. The month-to-month inflation was 3.3 per cent.

Gasoline the Leading Factor

The main cause of these unexpectedly high numbers were gasoline prices, which rose by 29.5 per cent. Oil and electricity were also more expensive, at 28.2 per cent and 0.9 per cent growth, respectively. Excluding gasoline, the annual inflation was 2.4 per cent in May, following a 2.2 per cent rise in April. Prices increased more in May than in April in almost all major components. Consumers paid more for transportation (9.1 per cent annual growth), food (+3.9 per cent), clothing (+1.1 per cent), health and personal care (+2.3 per cent), education and recreation (+2.4 per cent), and alcoholic and tobacco products (+2.7 per cent).

In Alberta and Calgary

The lowest inflation among
provinces had Alberta

The annual inflation fell from April to May in only one province, Alberta. Consumer prices advanced by 2.8 per cent in May. Albertans paid 29.2 per cent more for gasoline and 17.4 per cent more for natural gas, and 8.9 per cent more for bakery products. Mortgage insurance and home costs also grew. The reason for the lower inflation rates in Alberta is smaller price increases for major CPI items, including food, clothing, household operations, furnishings, and transportation.

The inflation rate in Calgary was the lowest in the country in May, when consumer prices rose only 2.4 per cent. Calgarians also paid more for food, transportation, shelter, and other CPI components, but the price growth wasn’t sharp. You can find Calgary’s inflation review here.

Impacts

Inflation is bonds’ worst enemy. If the trend of higher inflation continues, we should expect home loan rates to grow as well. However, they currently remain at great cost levels, and it’s prudent to take advantage of this.

The Canadian dollar is strengthening. It rose to a session high of C$0.9696 to the US dollar. The primary benefit of a strong currency is to be able to get foreign goods and services at lower prices.

Reactions

“This report will get markets thinking about a move by the Bank of Canada sooner than they had previously anticipated,” said Craig Alexander, chief economist with Toronto-Dominion Bank.

Scotia Capital economist Derek Holt doesn’t expect the Bank of Canada to hike the interest rate. He claimed that the decline in gasoline prices would moderate inflation in June. “Controlling for the seasonal adjustments and the clothing component (which rose 2.0 percent on a seasonally adjusted basis), I don’t see much of a fanning out of inflationary pressures here,” he said.

A Statistics Canada analyst pointed out that one factor of May’s increases was a switch to a new consumption basket based in 2009 from the old basket based in 2005. Using the old basket, monthly inflation would have been 0.6 per cent and annual inflation would have been 3.6 percent.

What Will the Bank of Canada Do?

The next Bank of Canada rate decision will be made on July 19. Craig Alexander, chief economist with Toronto-Dominion Bank, comments: “Quite frankly, I think the BoC is still focused on the economic risks. As a consequence, today’s inflation report doesn’t change our thinking the Bank of Canada probably won’t move off the sidelines until January of next year.”

The current inflation rate isn’t as troubling as it may seem, however. Remember, the seasonally adjusted numbers were much lower, and gasoline prices aren’t expected to follow its high growing trend, which would slow down price growth. Moreover, the persistent strength of the Canadian dollar could put additional downward pressure on inflation through weaker net exports and declines in import prices, as the Bank expected.