Canada’s All-items Inflation Rate Jumps on Higher Gas Prices
Canada’s All-items Inflation Rate Jumps on Higher Gas Prices
Canada’s all-items annual inflation rate jumped to 2.2% in May, much higher than market forecasts of a 1.9% rise. The Bank of Canada’s core inflation rate, CPIX, held at 1.5%, as-expected. The surge in the all-items inflation rate largely reflected a 15% rise in gasoline prices during the past 12 months. The month-over-month all-items index rose 1% in May relative to April, stronger than market forecasts for a 0.6% increase, while the CPIX rose an as-expected 0.3%.
The monthly increase in the all-items index reflected higher energy prices, with gasoline costs rising 8.8% combined with an as-expected rise in traveller accommodation costs, up 12.7%, and firmer air transportation costs, up 5.4%. Prices for food posted a solid 1% rise. Lower prices for passenger vehicles and women’s clothing had some moderating effect on the monthly change.
The biggest contributor to May’s 2.2% year-over-year rise was gasoline prices, which stood 15% higher than in May 2007, a pick-up from the 11.6% year-over-year increase in April. Prices of other fuels also firmed, jumping 49.3% relative to a year earlier. Mortgage interest costs also contributed to May’s stronger-than-expected annual rise and were up 8.9%. Homeowners’ replacement costs saw a slightly slower pace of increase and were up 4%. Mitigating some of the impact of the price increases were lower prices for the purchase and lease of passenger vehicles (down 8.1%) with women’s clothing prices 6.7% lower than a year earlier and falling fresh vegetable prices and computer equipment prices.
Canada’s inflation outlook has been marred by the steady rise in energy prices, which have pushed the all-items inflation rate from a recent low of 1.4% in March to 2.2% in May. In their June 10 press release, the Bank of Canada showed heightened concern about the inflation outlook, stating that if the recent spurt in energy prices persists “total CPI inflation will rise above 3 per cent later this year”. Policymakers still expect the core inflation rate to remain below 2% through 2009 as the excess capacity in the economy contains the pick-up in core prices. However, the three-month annualized change in core inflation held at 2.4% in May, remaining at the fastest pace since the three months ended June 2007.
It is becoming increasingly likely that the headline inflation rate will rise beyond the rates expected by policymakers in their April statement based on the current elevated energy prices compared to what was assumed in the Bank of Canada’s April forecast. In the near-term, the backdrop of sub-potential growth and growing excess capacity (the economy slipped into a state of excess supply following the contraction in first-quarter GDP) will likely keep the Bank on the sidelines to monitor the “important downside and upside risks to inflation”.
Upcoming U.S. economic data and events
The U.S. economic data calendar is light for the remainder of this week and early next week in the run-up to next week’s FOMC meeting. Today’s only releases include initial jobless claims for the week of June 14, the Philadelphia Fed manufacturing survey for June and the leading economic indicator for May. There are no data releases scheduled for Friday or next Monday.
Looking forward to next Wednesday’s Fed rate announcement, the Fed is still watching inflation expectations, but it may also remind markets that headline inflation is expected to peak in the summer months and recede thereafter as output gaps weigh in. If so, that may reduce odds of an early move by the Fed (futures markets are pricing in almost a 50/50 chance that the Fed will raise rates in June or August).
RBC Financial Group
http://www.rbc.com
The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.
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