Annual inflation shoots up to 1.5 per cent
The Canadian PressThursday, April 17, 2014
OTTAWA - A big jump in energy costs and cigarette prices helped push up Canada's inflation rate to 1.5 per cent last month, matching the highest level in the annualized consumer price index in almost two years.
The increase, while significant, was mostly in line with expectations of analysts, who had calculated that the observed strengthening of oil and natural gas prices last month would play a dominant role in the report Thursday.
However, analysts predicted that with oil prices continuing to climb the upward trend in inflation is likely not over and could hit two per cent as early as next month.
On Wednesday, Bank of Canada governor Stephen Poloz said he expects inflation to steadily climb to near the bank's desired two per cent target over the next few months. But added that he still believed inflation was too soft, attributing the current acceleration to temporary factors, particularly energy.
For a clearer picture of underlying inflationary pressure, Poloz said he would pay more attention to the core index, which excludes volatile items such as energy and fresh foods, and in March remained tame. It inched up just one-tenth of a point to 1.3 per cent.
Nevertheless, Scotiabank economist Derek Holt said Poloz risks painting himself into a corner with ongoing warnings about disinflationary risk.
"A risk here is that the BoC's emphasis upon downside risks to inflation will persist for too long, and the (bank) will face the awkward challenge of how to back off its guidance that the direction of the next rate move remains uncertain as inflation downsides fade," he said in a note to clients.
"I still think that rate hikes are a long way off, but the risk lies in markets getting spooked when the BoC ultimately shifts away from language governing downside risks to inflation."
Jimmy Jean of Desjardins Capital Markets said the Statistics Canada report sets the stage for headline inflation to reach the two-per-cent target as early as next month.
"In our view, downward inflation risks appear slim at present," he said.
The markets appeared to agree Thursday as the loonie gained a quarter of a cent in morning trading, sending the currency back above 91 cent US mark.
Bank of Montreal chief economist Doug Porter said although headline inflation is now consistently surprising on the high side, the soft core reading allows the central bank to stand pat on interest rates for some time.
Poloz said he does not expect core inflation, which he called a truer picture of underlying price pressures, to get back to the two per cent target until the beginning of 2016.
That is the time he believes the Canadian economy will be back to performing at full capacity, and also the year most economists expect the Bank of Canada will start hiking interest rates.
The biggest contributor to the March inflation escalation was energy, which rose 4.6 per cent overall, but also included a 17.9 per cent jump in the natural gas index, while electricity was five per cent higher and the cost of fuel oil increased 9.1 per cent.
Also noteworthy was a 7.6 per cent increase in cigarette prices, due mostly to the addition of new excise taxes on the product announced in the February federal budget.
Regionally, the biggest jump in inflation occurred in Alberta, where natural gas prices skyrocketed 81.5 per cent over last year's levels and 49.6 per cent over February. The province's annual inflation rate shot up to 3.9 per cent in March from 2.4 in February.
On a month-to-month basis, average consumer prices climbed 0.6 per cent, mostly due to a three per cent increase in gasoline from February.
Overall, Statistics Canada said prices rose in six of the eight major components, although most of the gains were modest.
Food prices, which play a major role in the overall inflation rate, were 1.5 per cent higher in March as they were a year ago, although fresh fruit was 8.8 per cent higher, fresh vegetables cost 5.3 per cent more and meat was up 3.4 per cent.
Meanwhile, shelter costs advanced 2.7 per cent, largely the result of increases in natural gas, electricity and fuel oil, but property taxes also contributed. Automobile prices rose 1.5 per cent on an annualized basis.
March was a good time to buy clothing and shoes, however, as prices on those personal items slipped 1.4 per cent over last year, while health and personal care dipped 0.2 per cent, mostly due to a drop in prescribed medicine charges.