22 October 2007

Inflation Report from the Canadian Chamber of Commerce

Headline inflation, as measured by the All-items consumer price index (CPI), rose 2.5% in September 2007 compared to a year earlier. This was a sharp acceleration from the 1.7% increase posted in August and the biggest jump in consumer prices in 16 months. The jump was owing largely to a big year-over-year increase in gasoline prices but the owned accommodation sector (i.e mortgage interest cost, as well as homeowners' replacement cost) also pushed up the 12-month change in the CPI. Declines in prices for natural gas and computer equipment and supplies dampened the upward pressure on average prices.

The Bank of Canada's closely watched core measure of inflation (which excludes the 8 most volatile components of the CPI as well as the effect of changes in indirect taxes) rose 2.0% between September 2007 and September 2006, compared with 2.2% the previous month. Core inflation is now at the Bank of Canada's desired inflation-control target of 2.0%.

On a regional basis, prices paid by consumers accelerated in 9 out of 10 provinces in September (Alberta was the exception), and residents in four provinces (+4.5% Alberta; +3.8% Saskatchewan; +2.9% in New Brunswick; +2.8% in Manitoba) experienced increases higher than the national average.

The bottom line: Core inflation averaged 2.2% in the third quarter, right in line with the Bank of Canada's latest prediction. The Bank will also take comfort in the fact that core inflation dropped to 2.0% in September. Looking ahead, upside risks to inflation stem from the fact that Canada's economy is operating above its production capacity, unemployment remains at a 33-year low of 5.9%, and average hourly wages continue to accelerate posting at 4.2% year-over-year increase in September. On the downside, the run-up in the Canadian dollar will act as a restraining force on output and inflation. "All factors considered, the Bank judges that the risks to the projection for inflation are roughly balanced, with perhaps a slight tilt to the downside". For the time being, the Bank is content on keeping its key policy rate on hold.

With crude oil selling above US$90 a barrel for the first time and inflation rising, the Canadian dollar jumped above 103 cents US early Friday.