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Winnipeg Free Press - PRINT EDITION

Landmark-low inflation eases push for rate hike

By: Staff Writer

Posted: 06/23/2012 1:00 AM | Comments: 0

OTTAWA -- Canada's inflation rate tumbled to the lowest level in almost two years last month, removing the last pressure point on the Bank of Canada to raise interest rates.

Statistics Canada reported Friday May's inflation rate fell almost a full point to 1.2 per cent -- the lowest since June 2010 -- and prices overall were actually a smidgen lower last month than they were in April.

Analysts cautioned the sharp decline from two per cent in April does not augur a period of no inflation or even consumer price declines, but it does suggest the cost of living in Canada will remain stable in the short term.

The big reason for the drop was gasoline prices, which fell 2.3 per cent from this time last year. But the price of natural gas also declined, as did video equipment and women's clothing, while price increases on many other consumer goods and services moderated.

"While this is good news overall, I wouldn't get too carried away thinking we're headed for deflation," said Doug Porter, deputy chief economist with BMO Capital Markets.

"There were some special timing factors that made the inflation numbers look more benign than is the reality. But inflation at this point is the least of our worries... the pressure on the Bank of Canada to move on rates is vaporizing."

The TD Bank also saw the report as a bit of an "outlier," saying underlying price growth is better reflected by the 1.8 per cent core inflation index -- which excludes volatile items such as gasoline. Still, that is well within the two per cent Bank of Canada target.

The timing factors mostly involve energy. Gas prices rose almost 30 per cent in May 2011 on an annualized basis, before beginning a pullback in June. This year, the peak appears to have been in April and the retreat started in May.

That suggests next month's inflation number won't show such a steep decline, or may even rise, unless gas prices fall even more steeply this month than in June 2011. Energy is a major component of the CPI, along with food, so any significant change in either tends to be reflected in the overall inflation measure.

Bank of Canada governor Mark Carney has been giving every indication in the past few months he is eager to return interest rates to more normal levels after staying at a super-low policy setting of one per cent since September 2010, in part because he worried low borrowing costs are luring too many Canadians to take on debt.

-- The Canadian Press

Republished from the Winnipeg Free Press print edition June 23, 2012 B4

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