OTTAWA - Canada's annual inflation rate rose slightly to 1.5 per cent last month, but most consumer prices stayed well in check and there were few signs of building cost pressures in any region of the country.
Statistics Canada said increases in the price of passenger vehicles, electricity, food, and homeowners' replacement costs were mostly responsible for June's slightly higher rate, which was up three-tenths of a point from May.
Economists had actually projected an even greater uptick given May's extremely low reading of 1.2 per cent.
But they also cautioned that most of the increase would be temporary, caused by unusual base-effects from a year earlier when gas prices were receding and auto dealers launched an aggressive program of discounting.
The agency noted that discounting occurred this June as well — with car prices 2.7 per cent lower than they were a month earlier — but less so than happened a year earlier.
As well, gasoline prices continued to trend downwards this June by 3.2 per cent from May, but not as sharply as occurred last year at this time.
A truer picture of the inflation trend was reflected in the monthly measure, which saw the overall price of consumer goods and services Canadians regularly purchase fall by 0.4 per cent from May.
"Despite the many moving parts and all the dire headlines on food and energy, Canadian inflation remains remarkably stable, and one of the least of our economic concerns," said Doug Porter, deputy chief economist with BMO Capital Markets.
Porter noted that food prices could become a concern down the road. A severe drought in the U.S. has sent corn and soybean prices to record highs and put upward pressure on wheat.
"It's a North American market for a lot of food prices, so that will find its way into the Canadian basket as well," he explained. "In the past we've found the lag could be as long as nine months, so this could become a big issue around the turn of the year."
Earlier in the week, the Bank of Canada said it expects overall headline inflation to remain below its two per cent target for about a year.
The central bank's other measure — core inflation, which excludes volatile items like energy and fresh vegetables and fruit — bore monitoring as it rose two-tenths to two per cent, but still dead on the bank's target line.
Analysts doubted bank governor Mark Carney would spend many sleepless nights worrying about inflation, even core. Dismal global growth should keep any inflation pressures at a safe setting for some time, despite record low interest rates designed to pump up spending.
"With core inflation likely to continue hovering around the two per cent target given that the economy is operating close to potential, and new mortgage-lending rules expected to help cool down the housing market and household debt growth, the Bank of Canada is not feeling much pressure to alter the overnight rate," said Dina Ignjatovic, an economist with TD Bank.
"We expect the bank to remain on hold until March 2013."
This week, Carney kept the overnight rate at one per cent for the 15th consecutive policy meeting dating back to September 2010, although he surprisingly kept the "bias" toward hiking rather than cutting interest rates in the future.
The key stand-out in Friday's report was that the cost of electricity rose by 5.9 per cent from last year, with most of the increases in Ontario, Alberta and British Columbia. But the agency noted that even with this sharp increase, the energy component declined 0.8 per cent in the 12 months, following a decrease in May.
In fact, for the second consecutive month, energy costs acted as a drag on annual inflation, which had not been the case since October 2009. Excluding that segment, the overall consumer price index would have risen to 1.7 per cent in June, the agency said.
On an annual basis, food rose two per cent, transportation costs by 1.7 per cent and shelter costs increased 1.3 per cent.
On a monthly basis, natural gas, fresh vegetables, financial services, electricity and hotel accommodation all cost more than in May. But cars, clothing, gas, non-alcoholic beverages and mortgage interest charges cost less.
Regionally, there were no price hot-spots as the inflation rate ranged from a high of 2.2 per cent in Newfoundland and Labrador, to a low of 1.2 per cent in Ontario.
What Is Inflation?
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.
International Lending And Exchange Rates
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.
The Money Supply
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
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.
Other Methods Of Control
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.