OTTAWA - Consumer prices in Canada jumped by a surprisingly strong 1.2 per cent in February as a big hike in gasoline helped fuel the biggest month-to-month pop in inflation since January 1991 when Ottawa introduced the GST.
The one-month increase lifted the Canadian annual inflation rate by 0.7 point, also to 1.2 per cent, reversing a trend that had reduced annual inflation to 0.5 per cent in January, the lowest in more than three years.
Economists had expected inflation to start edging up, particularly as gasoline prices were known to have risen, but their best estimate was for a year-to-year increase of 0.8 per cent and a month-to-month increase of 0.7 per cent.
Despite the one-month inflation shock, analysts said Canadians had little to worry about and that the Bank of Canada will likely discount the report as an anomaly.
The roller-coaster movement in inflation was most likely due to temporary factors on both the upside and downside, they said.
"It was a surprise but it was predicated on some temporary factors that are likely to ease as we go forward into the next month or two, so I'm kind of inclined to look through it," said Derek Holt, vice-president of economics with Scotia Capital.
Holt said the steep increase in gasoline prices from January to February — 8.4 per cent — is not being repeated in March.
BMO's Doug Porter said the February result likely shows there was an end to deep discounting associated with the Christmas shopping season.
But he notes the higher inflation rate, while not good news for consumers, is still well shy of the Bank of Canada's two per cent target and likely ends any speculation the central bank may lower interest rates to stimulate the economy.
A prolonged period of below trend inflation is an indicator of soft domestic demand, which at its worst, could weaken the economy by encouraging consumers to delay purchases in expectation of lower prices in future. The central bank would likely be reluctant to hike rates to compensate, however, for fear Canadians would borrow more and increase their debt loads.
"There was some talk of the Bank of Canada cutting rates because of the risk of deflation, but this has wiped that away, Porter said.
The surprising February report does not alter analysts' expectation that inflation is a spent force in Canada in the longer term.
"With economic growth expected to remain below the economy's potential, we expect disinflationary pressures to intensify in the coming months," explained David Madani of Capital Economics.
The consensus view of the economy is that growth will be limited to 1.6 per cent this year, the slowest pace of expansion since the recovery began in July 2009. The view by Capital Economics is even tamer at 1.2 per cent.
Gasoline's one-month spurt in February, after declining in January, pushed pump prices to an increase of 3.9 per cent annualized, contributing to a two per cent overall increase in the cost of transportation.
The other big mover was dealer auto prices, which rose 2.1 per cent on the month and 2.5 per cent over the past year, as fewer manufacturers' rebates were offered in February.
Statistics Canada said there were also price increases in many other categories, helping lift the Bank of Canada core inflation index by almost half a point to 1.4 per cent. Economists had expected the core rate to remain at 1.0 per cent.
Besides gasoline and cars, clothing increased by five per cent from January to February, food by 0.9 per cent led by a 6.4 per cent jump as fresh vegetables, while travel accommodation rose by 4.5 per cent.
Restaurant meals were up 2.2 per cent, food 1.9 per cent, rent 1.6 per cent, homeowner replacement cost up 2.3 per cent and alcohol and tobacco increased by two per cent.
Not all items saw increases in prices, however. With interest rates remaining a rock-bottom levels, mortgage interest costs were down 4.2 per cent in February from a year ago, video equipment cost 10.2 per cent less, children's clothing was 6.5 per cent lower and digital computing equipment and devices were 5.1 per cent cheaper.
The agency said inflation rose at a faster pace last month in all 10 provinces, with Newfoundland and Labrador topping the list at 2.3 per cent.
In a separate release, the agency said average weekly earnings of non-farm payroll employees edged up 0.1 per cent in January and were 2.7 per cent higher than in January 2012.
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.