Canada`s Inflation Rate Remains High

[Jack]

Canada`s all-items inflation rose 0.1% in September, sending the year-over-year rate down slightly to 3.4% from 3.5% in August. The Bank of Canada’s core measure, which excludes the eight most volatile components and the effects of changes in indirect taxes, rose 0.4% in the month and 1.7% over the year.Although overall prices rose modestly in September, this followed a 0.2% drop in August. This reversal in direction of prices largely reflected a pause in the downward slide in gasoline prices, which rose 0.9% in the month after a 6.6% drop in August.

The gain in core prices largely reflected sizeable seasonal increases in a couple of components. For example, tuition fees are only reflected in the CPI once a year in September with the increase this year of 4% up from 3% a year ago. Similarly clothing and footwear prices generally move higher in September.

With crude oil prices plummeting and refinery capacity restored, gasoline prices are poised to move lower going forward. As well, with growth in Canada likely to be further restrained by continuing tight credit conditions and the U.S. economy falling into recession, growing slack in the system should put downward pressure on all prices that will likely result in third-quarter inflation marking a near-term peak.

The Bank of Canada’s economic forecast released this week shared this view that inflation is poised to trend dramatically lower through next year. Thus, it is the downside risks to growth, rather than upside risks to inflation, that have assumed priority consideration and prompted the central bank to concede that “some further monetary stimulus will likely be required.”

Our forecast assumes that the overnight rate will be cut by further 25 basis points before the end of the year to 2.00%. However, even greater easing may be necessary if there is any intensification of either the factors currently weighing on economic growth.

Dawn Desjardins, Assistant Chief Economist, RBC Economics Research

 

[Dan_Eisenhauer]

I am obviously from a different era. It bewilders me that people consider a 3.4% inflation rate high.

My formative adult years were in the time of Wage and Price Control, when Pierre Trudeau`s government legislated the amount that wages and prices could increase by. As I recall, inflation was running about 10% - 12% at that time. Interest rates were in the low 20`s.

This is just an observation from one who has been there.

 

[Jack]

QUOTE My formative adult years were in the time of Wage and Price Control, when Pierre Trudeau`s government legislated the amount that wages and prices could increase by. As I recall, inflation was running about 10% - 12% at that time. Interest rates were in the low 20`s.

Yep, you`re thinking of the historical "Twin Peaks" of Canadian inflation, where it went up to 14% in `74 (I think), then back down to around 6 - 6.5ish for the next couple years, then shot back up to 12% in `79.

Point is, for about 15 years now it`s hovered around 2%, so it is "high" on a relative basis.

 

[GarthChapman]

I like this. 3.4% inflation basically means that my mortgage that are at prime less 0.6% or better are `free money`. What a great country!

Dan, I also think of high inflation as that being around 10-12% or higher. I remember when for a long time we thought that any time you could lock in a mortgage at 10% or less it was a great deal.

From a lay person`s perspective it seems to me that what has in large part created our long-term climate of low inflation is low trade barriers around the world and lots of emerging markets low wage earning workers are making the products and services for consumption in our high wage economies. If trade barriers go up or if we run out of emerging markets it seems to me inflation would go up. I`d love to see some thoughts on this from our more learned economist types on this site.