BUSINESS
09/21/2011 07:12 EDT | Updated 11/21/2011 05:12 EST

Canada Inflation: Gasoline, Food Push Annual Rate To 3.1 Per Cent In August Surprise

Flickr: revenante

OTTAWA - Canada's inflation rate jumped past three per cent last month, but with the economy's foundations in quick-sand, there is little prospect of a Bank of Canada response.

The surprisingly strongly gain in the Statistics Canada consumer price index to 3.1 per cent, from 2.7 in July, reverses a recent trend towards more moderate inflation.

But economists pointed to Bank of Canada governor Mark Carney's comments Tuesday that he believes consumer prices will moderate as high food and energy costs unwind in the face of a slowing global economy.

Even if he wanted to, the traditional response to contain inflation — hike interest rates — would appear out of the question at the moment, said David Madani of Capital Economics.

"The anticipated economic slowdown we have long envisaged has now completely shut the door on any interest rate increases anytime soon, with rate cuts now more likely than before," he said.

As well, Carney and most analysts remain convinced that the higher-than-expected price increases are due to temporary factors.

The central banker said this week he anticipates the higher levels of food and energy will "unwind" as the global economy slows.

Bank of Montreal economist Michael Gregory adds that August's jump was also partly due to one-off "administered" increases, such as adjustments to electricity rates and insurance premiums.

"Yes, it's a little bit worrisome," he said of the inflation jump. "But I'm not worried at all whether the underlying trends have changed."

Money markets also saw no likelihood of a Bank of Canada reaction and punished the loonie after the news, dropping the currency 0.36 of a cent to 100.28 cents US.

Statistics Canada said gasoline and food, two items that constitute significant portions of household spending, continue to be big drivers of annual inflation. Gasoline was 22.8 per cent more expensive last month than in August 2010, and food cost 4.4 per cent more.

Electricity, house and mortgage insurance, telephone service, jewelry and autos, coming off the summer's deep discounts, contributed to the 0.4-point gain to annual inflation from July, the agency added.

Overall, prices rose in all eight major components tracked by Statistics Canada, and increased at a faster pace than the previous month in five of those components. Underlying core inflation, which the Bank of Canada watches closely, rose to 1.9 per cent from 1.6.

Bucking the trend, mortgage interest costs declined 1.7 per cent, video equipment was down 13.9 per cent, prescribed medicines slipped 3.9 per cent, natural gas one per cent, and digital computing equipment and devices fell 10.4 per cent.

Gregory cautioned that there will come a time when Carney and other central bankers will need to pay closer attention to inflation.

The stubbornly high levels of inflation now suggests that strong commodity prices are flowing through to the retail level, and cheap Chinese imports — for a long time a source of disinflation — are starting to appreciate as the world's largest economy deals with its own price pressures and currency appreciation.

"It could ramp up quickly if the economy ramps up quickly," he said. "Let's face it, it wasn't too long ago the Bank of Canada was giving not so subtle signals that the time they have to start raising interest rates again is getting a lot closer."

But Carney has stopped issuing such cautions, he added, and at the moment has bigger fish to fry in dealing with a potential financial crisis over European sovereign debt.

"The main worry, and Carney was quite blunt about it, is the banking system," Gregory said.

G20 central bankers and finance ministers will be meeting in Washington Friday and Saturday with the European crisis, along with financial systems reforms, topping the agenda.