August 31, 2010
Economy at a Glance
Canada’s Consumer Price Index back on target in July
ALEX CARRICK
Chief Economist, CanaData
Canada’s all-items inflation rate in July moved up to +1.8% from +1.0% in June, according to Statistics Canada. The rise was partly due to July 1st harmonized sales tax (HST) introductions in Ontario and B.C., plus a 2% increase in Nova Scotia’s blended sales tax.
The Bank of Canada will be pleased. The +1.8% figure is quite close to the central bank’s +2.0% stated target.
The core inflation rate in Canada, as calculated by the Bank of Canada, excludes indirect taxes and the eight most volatile sub-components of the overall CPI. In other words, the HST is a consumption tax that is omitted in the calculation of the core rate. The core rate increase was +1.6%. These numbers for Canadian inflation suggest an economy that is performing fairly well at the moment, even as concerns about a U.S. slowdown spreading here are casting a shadow.
In the U.S., consumer prices increased 0.3% between June and July, after declining on a month-to-month basis in June (-0.1%), May (-0.2%) and April (-0.1%). The latest increase is welcome news to those who have been worrying about the possibility of deflation. Year-over-year all-items prices in the U.S. are +1.2% and the core rate (less food and energy) is +0.9%.
In the U.S., one of the most notable price movements is among transportation equipment. New vehicle prices have barely budged from last year (+0.9%). However, used car and truck prices are +17.0%. The financial crisis and accompanying credit squeeze have caused a shift in consumer buying patterns. Used car prices may be up year over year, but they are still cheaper than new car prices, catching the attention of buyers who are watching their family budgets much more carefully. Used car demand is symptomatic of belt-tightening by American consumers.
Despite the relatively modest change in overall prices in Canada, there are clear indications that most Canadians are coming under some assault from price increases. One need only look to water, fuel, electricity and other utility charges. On a year-over-year basis, the leader is fuel oil (+22.6%), followed by natural gas (+12.6%), electricity (+9.8%) and water (+5.9%).
The Atlantic region suffers the most in this comparison because it is deeply committed to fuel oil usage. The prices of all utility products are subject to government regulation. And the price pressure will only get worse over the next several years. For example, major new electricity installations are hugely expensive to build and the lead time to power generation is very long.
Furthermore, the shift to energy conservation and a cleaner environment is resulting in the application of staggered charges based on “smart” meters and “time-of-day usage.” Some households will have the flexibility in their work schedules to take advantage of lower prices for off-peak consumption. Many others will find adjustments impossible and their costs will go up.
Higher costs for necessities cut down on income available for the purchase of more discretionary items. There are bargains to be found, however, if shoppers search hard enough. Canadians are getting price breaks on some items that are often imported, such as women’s clothing (-7.4% year over year), children’s clothing (-10.3%) and home entertainment equipment (-6.2%).
Buried deep in Statistics Canada’s CPI report is an inter-city comparison of retail prices for a representative subset of the total CPI basket. With total Canada set equal to 100, prices in Toronto are 7% higher than the national average. Ottawa (+3%), Edmonton (+1%) and Vancouver (+1%) are the other major cities that are pricier than elsewhere in the country.
Winnipeg (-6%), Saint John, N.B. (-5%), Montreal (-5%) and Regina (all -5%) are the cities most blessed with prices below the national average.
For more articles by Alex Carrick on the Canadian and U.S. economies, please see his market insights. Mr. Carrick also has an economics blog. His lifestyle blog is at www.alexcarrick.com
(CPI and CPI-U not seasonally adjusted)
Data sources: Statistics Canada and U.S. Bureau of Labor Statistics (Department of Labor).
Chart: Reed Construction Data - CanaData.
(CPI core & CPI-U less food and energy not seasonally adjusted
*Note: Core inflation in the United States is CPI-U less food and energy. Core inflation in Canada is as defined by the Bank of Canada. It is the Consumer Price Index (CPI) excluding the eight most volatile components: fruit, vegetables, gasoline, fuel oil, natural gas, intercity transportation, tobacco and mortgage interest costs. It also excludes the effect of changes in indirect taxes on remaining items.
Data sources: Statistics Canada and U.S. Bureau of Labor Statistics (Department of Labor).
Chart: Reed Construction Data - CanaData.
