OTTAWA - Canada's inflation rate dipped to the lowest level in 18 months in March as price gains in food and gasoline slowed dramatically — although consumers may find it difficult to see the savings.
Statistics Canada reported Friday that the national inflation rate dipped seven-tenths of a point to 1.9 per cent — the first time since September 2010 that the rate has been below the Bank of Canada's sweet spot of two per cent.
Economists had anticipated a major retreat in the annual inflation rate, which had been rising the previous three months, but the drop was even more dramatic than expected.
But unless Canadians have long memories, they won't much notice the difference. In fact, they may feel the cost of most things they buy are continuing to rise.
That is because in the most immediate and visible comparison of prices — the non-seasonally adjusted month-to-month movement — consumers did in fact pay 0.4 per cent more for most items in March than they had a month earlier.
Compared with February, Canadians paid more for gas, transportation, clothing and footwear and the costs associated with recreation, education and reading.
But the dramatic drop-off in the annual inflation rate — current prices compared with March 2011 — will be a welcome development for borrowers, since it will ease pressure on the Bank of Canada to hike interest rates as it suggested this week it soon might.
The central bank's core inflation rate, which it uses to measure underlying price pressures after excluding volatile items like energy and some foods, also fell to 1.9 per cent in March.
"The easing in inflation pressure is very welcome news for Canadians," said Arlene Kish of IHS Global Insight.
"Canadians are already cash-strapped given our low savings rate. As well, based on research from the Bank of Canada, some consumer purchases are being financed by home equity lines of credit."
But the inflation numbers won't be much of a surprise to the central bank. It had predicted earlier this week that the consumer price index would "moderate" and "be around two per cent ... as the economy reaches its production potential" in about a year's time.
Bank of Montreal economist Robert Kavcic said given that gasoline prices continued to rise into April last year, it may be possible to see annual inflation fall further next month should gas prices remain stable this April.
As for food, the correction was long overdue, he said.
"We're overdue to see food inflation cool because agricultural prices started coming off as early as the middle of last year," he explained.
"Given the trend we've seen in raw commodity prices, it's probably a safe bet that (food) will ease further. You also have a lot of competition heating up in the grocery store sector (with) Target coming in next year."
The Bank of Canada's prime mandate is to keep inflation at or as close to two per cent as possible, but Kavcic and other analysts believe governor Mark Carney will base his decision on what to do with interest rates more on how the economy performs than on the CPI.
In an analysis, CIBC chief economist Avery Shenfeld argued Carney's signal about possible future rate hikes is based on the bank view that the economy is growing slightly stronger this year than consensus — 2.4 per cent versus 2.1. If it turns out to be wrong, the current output gap won't close and the central bank will be left with no good reason to hike borrowing costs.
"No acceleration in growth, no pressure on core inflation, no rate hikes," Shenfeld wrote in his end of week note to clients.
In its statement keeping the policy rate at one per cent a little while longer, the bank focused most acutely on improving growth trends globally and domestically. On a year-over-year basis, Statistics Canada said the slowing acceleration in consumer prices was widespread.
Most dramatic was in the cost of food, which was just 2.2 per cent higher this March compared with last year, a major retreat from the 4.1 per cent difference seen in February.
And although the pump price of gas remains elevated and is 6.6 per cent higher now from last March, that's less than the 8.9 per cent year-over-year increase seen in February.
That contributed to a slowdown in increases on the cost of energy overall to 5.1 per cent from 7.2 the previous month, and electricity to 5.3 per cent from 8.7 per cent.
The overall cost growth in transportation, which is influenced by gasoline prices, also moderated to 3.8 per cent.
Other big movers, although they comprised less significant parts of the overall basket, included fresh vegetables, which were 15.8 per cent less expensive in March than last year; video equipment, which fell 13.5 per cent; furniture, down 4.9 per cent, and women's clothing, slipping 2.1 per cent.
The agency said price growth on a year-over-year basis slowed in every province in the country.
On a month-to-month basis, however, prices rose in four of the eight major components, led by gasoline, which went up 4.4 per cent from February, and clothing and footwear, which increased by 3.2 per cent.
Inflation refers to the increasing price of goods and services that ultimately decreases a nation's purchasing power. As the cost of living increases, each unit of currency buys less. The result is a decrease in the value of a nation's currency.
Inflation is measured by Statistics Canada using the Consumer Price Index (CPI). The cost of a fixed "basket" of goods and services purchased by typical consumers is tracked over time. About 650,000 prices are checked each year across Canada.
The number that determines the rate of change of prices (usually calculated monthly or annually) is the rate of inflation. The core rate of inflation excludes the most volatile items in the CPI basket, such as gasoline, vegetables, and tobacco.
As nations borrow money from each other, prices can rise as a response to interest and national debt. Inflation can also occur when a currency's exchange rate plunges, causing imports to spike in price.
Widely considered a long-term cause for inflation is the amount of money in circulation. However, there is disagreement among economists as to how the money supply affects inflation. Many say that as governments print excesses of money to cope with crises (for example, to revive an economic recession), prices increase dramatically. But others argue the recent economic crisis, which resulted in the printing of money but little inflation, disproves that theory.
Production and labour costs are factors contributing to inflation. If the raw materials for a product increase in price, so does the price of the final product. Similarly, a rising cost of living causes workers to demand increased wages--costs that are passed on to the consumer.
When prices fall, what occurs is the opposite of inflation: deflation. This is typically considered dangerous because lower prices can correspond with lower demand, leading to a deflationary spiral. Depressions are linked to deflation, but deflation itself doesn't always symbolize a bad economy. For example, more efficient production can result in price deflation, but that doesn't indicate a shrinking economy.
Fast economic growth is not always beneficial because it can lead to hyperinflation--a cycle of rapidly rising prices. When there is a drastic increase in the money supply without a corresponding increase in demand, the value of each unit of currency diminishes. In the picture above, a woman protests hyperinflation by carrying around worthless notes in Serbia during its hyperinflation crisis in 1992.
The Bank of Canada employs interest rates to maintain a target inflation rate. The bank can raise interest rates when inflation is too high, or lower them when it's too low. With high interest rates, demand typically decreases for certain goods and services as they become harder to finance.
In an attempt to control inflation, Prime Minister Pierre Trudeau's government introduced the Anti-inflation Board (AIB) in 1975. It was the board's responsibility to supervise and control wages and prices, and was part of a 1970s trend -- followed even by U.S. President Richard Nixon -- that saw politicians attempt to legislate away inflation. Canada's program was phased out in 1978, and most Western countries abandoned price controls after finding them largely ineffective.