Canada's Inflation Rate Stays in Positive Territory
Canada's headline inflation rate rose by 0.7% in May, a much steeper increase than the market forecast for a 0.4% rise. Even with this hefty monthly gain, the annual inflation rate continued to moderate, coming in at 0.1% from 0.4% in April. The positive headline inflation rate was contrary to expectations for a negative print. The core measure, calculated by the Bank of Canada which excludes the eight most volatile components, increased by 0.4%, much more than forecasts for a 0.1% increase and was 2.0% higher than a year earlier, up from 1.8% in April.
The stronger-than-expected monthly increase in consumer prices in May reflected an 8.3% jump in gasoline prices, rising passenger vehicle insurance premiums and higher costs for traveller accommodation. Prices for women's clothing, mortgage interest costs and homeowner's replacement costs were lower in May relative to April, thus providing some offset.
The unexpected rise in the year-over-year rate reflected the sharp increase in the cost of food, which was 6.4% higher than in May 2008. Food makes up 17.04% of Canada's CPI basket. Meat and vegetable prices were up 6.5% and 16.4%, respectively. While mortgage interest costs were lower in May than in April, they were still 1.9% higher than in May 2008. Vehicle insurance premiums were 4.3% higher than in May 2008. Mitigating these upward pressures were sharply lower gasoline prices relative to a year earlier (-25.1%) with other fuel prices following suit, falling vehicle prices (-6.8%) and lower homeowner's replacement costs (-3.4%).
The trend in the seasonally adjusted core rate (measured by the three-month annualized change in the three-month moving average of CPIX) firmed in May to stand at 1.4%, although was still slower than January's 2.5% pace.
Gyrations in energy prices continue to be a heavy influence on the direction of Canada's inflation rate, which moderated to 0.1% from April's 0.4% even in the face of a sharp monthly increase in May. Excluding the energy component, the inflation rate has been much more stable, trading between 1.5% and 2.5%, while the all-items inflation rate's range was between 3.5% and 0.1%. The core measure, which aims to provide a read on underlying price pressures, rebounded back to the Bank of Canada's official 2% target in May. The aggressive policy actions by the Bank of Canada have been aimed at restoring the economy's growth momentum and ensuring that the inflation rate is at the 2% target over the medium-term.
While the headline inflation avoided falling into negative territory this month, we still expect negative prints in the months ahead. With the economy undergoing a relatively severe downturn and the U.S. economy on track for the worst recession in the post-war period, the central bank and economists expect that core prices will ease relative to a year earlier. As indicated above, some of the decline in the headline inflation rate is purely the result of energy prices being much lower than they were last summer. Once the impact of this factor fades (and we expect it to reverse), the pressure from this component will switch from weighing down the inflation rate to bolstering it.
The Bank of Canada is monitoring several fronts and assessed earlier this week that while funding and capital adequacy has improved, the state of household balance sheets and the temperature of the global economy remain a concern. If any of these factors looks likely to exert additional downward pressure on the economy, the Bank may opt to implement less traditional measures to hit the economy with even more stimulus. Our base-case view remains that, with interest rates low, fiscal stimulus flowing into the economy and the global outlook improving, the Bank will not have to adopt additional measures but will maintain its policy rate at the current low level well into 2010.
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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