Canada's Inflation Rate - Up Again in July

Daily Forex Fundamentals | Written by RBC Financial Group | Aug 21 08 12:50 GMT |

Canada's all-items inflation rate was 3.4% in July, in line with market forecasts and the fastest pace of increase since March 2003. The inflation rate was 3.1% in June. The Bank of Canada's core inflation rate, CPIX, held steady at 1.5%, slightly lower than the expected 1.6%. The increase in the all-items inflation rate largely reflected a 28.6% rise in gasoline prices over the past twelve months. Excluding gasoline, consumer prices were 2.1% higher than a year earlier, up from June's 1.8%.

On the month, the all-items index rose 0.3% in July relative to June, slightly slower than market forecasts for a 0.4% increase while the CPIX rose 0.1% on the month, slower than forecasts for a 0.2% increase. The seasonally-adjusted all-items index also rose 0.3% in July.

The monthly increase in the all-items index reflected higher energy prices with gasoline costs rising 1.2% and natural gas prices up 8.8%. Electricity prices also firmed and were up 1.9%. Prices for food posted a 0.6% increase building on June's 1.1% rise and May's 1% gain. Prices for the purchase and lease of motor vehicles dipped by 2.2% in July building on June's 0.5% decline and had a moderating effect on the monthly change.

On a year-over-year basis, the biggest contributor to July's 3.4% rise was gasoline prices which stood 28.6% higher than in July 2007. Prices of other fuels also firmed, jumping 49.4% relative to a year earlier and natural gas prices were up 25%. Mortgage interest costs also contributed to July's annual rise and were up 8.5%. This was slightly slower than June's 9% increase as the pace of house price gains slowed. Mitigating some of the impact of the price increases were lower prices for the purchase and lease of passenger vehicles (-8.9%) as manufacturers continue to give incentives. Computer equipment prices posted a 12% decline, slightly less than June's 13.2% drop.

With Canada's headline inflation rate continuing to plod higher for the fourth month running, it's hard to get too excited about the prospect that the Bank of Canada will ease the policy rate anytime soon. To be sure, the core measure remains secured below the mid-point of the Bank's target band but with a 3.4% headline inflation rate policymakers will remain wary about a pickup in inflation expectations. Recent data reports suggest that the economy rallied back in June with real GDP growth forecast at 0.2% on the month and second quarter growth expected to come in at a 0.8% annualized rate - an improvement after the marginal annualized dip of 0.3% in Q1. In the near term, the Bank is likely to hold the policy rate steady at 3% weighing the prospect that the above-target headline inflation rate will filter into the broader economy against downside risks to the growth coming from the recent softening in the labour market and housing data and persistent worries about the outlook for the US economy.

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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.