Today's Markets

Gasoline cost pushes up prices

HEATHER SCOFFIELD

Wednesday, July 23, 2008

OTTAWA — Canada's consumer prices were up a huge 3.1 per cent in June compared to a year ago, pushed higher by expensive gasoline, Statistics Canada says.
June's increase was the largest since September, 2005. Excluding gasoline, total inflation was up 1.8 per cent in the past 12 months, Statscan said.

Core inflation, which excludes the most volatile prices, was far more subdued, rising just 1.5 per cent.

Economists had been expecting a big leap in total inflation in June, projection 2.9 per cent year over year, compared to a May rise of 2.2 per cent. For core inflation, economists had forecast 1.6 per cent in June, compared to 1.5 per cent in May.

From a month earlier, total inflation rose 0.7 per cent in May, and the core index rose just 0.1 per cent, mainly in line with economists' expectations.

Although the June numbers were slightly higher than projected, and the total inflation number may come across as quite high, economists played down the inflation report, and warned not to get too excited about the spike.

“While headline inflation pushed above 3 per cent for the first time since September, 2005, core inflation remained at 1.5 per cent for the third consecutive month, signalling once again that current inflation fears are overblown and that there is room for the Bank of Canada to reduce rates once again if needed,” economists at Bank of Nova Scotia said in a note to clients.

“While higher headline inflation will feed into core inflation with a lag, a weakening Canadian economy will continue to offset these pressures.”

For the year, the main reason total inflation soared is because gasoline prices were up 26.9 per cent between June, 2007, and June, 2008, Statscan said. That's the biggest surge since the 34.7 per cent leap recorded in September, 2005, after hurricanes Katrina and Rita.

Gasoline prices have risen substantially, but the inflation number seems particularly large because gas prices were falling in June, 2007.

Mortgage interest costs, bakery products and air transportation were also major drivers of the 3.1 per cent annual inflation rate, Statscan said.
Mortgage interest costs were up 9 per cent.

And food costs soared 3 per cent in June compared with a year earlier, led by a 12.3 per cent increase in bakery products. Food prices have been rising sharply around the world, except in Canada, where a strong Canadian dollar, intense competition, and local production kept prices low until now.

“While still relatively mild versus most of the rest of the world, that's a big acceleration from earlier this year when grocery prices were actually down on a year-over-year basis,” commented Douglas Porter, deputy chief economist at BMO Nesbitt Burns.
Air transportation prices rose 14.3 per cent, the largest increase since May, 2002, as carriers pass along higher fuel costs to their customers. Overseas flights saw the largest increases.
A few falling prices helped mitigate the overall rise in inflation. Vehicles fell 8.4 per cent year-over-year, and computer equipment dropped 13.2 per cent. Clothing and footwear prices fell 0.6 per cent – but that's not as big a drop as usual for June, Mr. Porter said.
But over all, goods prices rose 2.5 per cent – a much larger leap than usual for this category, which has seen little change whatsoever in prices lately. Services prices rose 3.7 per cent.

By province, Prince Edward Island and Alberta saw the biggest increases, with inflation well over 4 per cent in both provinces, driven by rising energy prices. Excluding energy, Saskatchewan saw the highest inflation rate among the provinces, at 2.6 per cent, mainly because of housing.

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