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Thanks to Cheaper Gasoline, Canada’s May Inflation Rate Retreated

06/22/2012 by Alex Carrick, RCD Canadian Chief Economist

Too-rapid price inflation is vanishing as a topic of conversation in the current economic debate.

Statistics Canada has reported that the all-items Consumer Price Index (CPI) in May was +1.2% on a year-over-year basis, down from April’s +2.0% level.

The main reason for the moderation was a lowering in gasoline prices. They declined 3.5% month over month and were 2.3% below May of last year.  

The “core” rate of inflation in Canada - which omits eight highly volatile components such as fruits and vegetables as well as gasoline - was +1.8%. That was also a deceleration from April (+2.1%), although of a lesser magnitude.

How do Canada’s current inflation numbers compare with the U.S.?

The American all-items inflation rate in May was 1.7%. Excluding food and energy – i.e., the U.S. definition of the “core” rate – yielded a price gain of 2.3% year over year.

U.S. gasoline prices in the latest month were -6.8% versus April and -4.0% when compared with May of last year.

World oil prices have been on a downward slide. Their post-recession high of $110 U.S. per barrel has given way to a figure that’s now less than $80. The $110 peak was stoked by the conflict in Libya last year.

(The all-time peak price for world oil was in July 2008 at nearly $150 U.S. per barrel.)

The drop in the world price of oil has been in reaction to a build-up of inventories as world growth has softened. Also, while the Arab Spring continues, geo-political tensions arising from the actions of certain oil-producing Middle Eastern states have eased marginally.

With inflation so constrained, the Bank of Canada doesn’t have to worry about its highly stimulatory level of interest rates. They clearly aren’t contributing to a run-up in prices yet.

Some would say the important word in the preceding paragraph is “yet”, but that’s an issue for another day.

The “target overnight rate” has been sitting at 1.00% for nearly two years.

They were raised to that level in September 2010, after reaching an all-time low of 0.25% in the recession. American rates remain at or below that “basement” level and the Federal Reserve has committed to keeping them there well into 2014.

None of the foregoing is to suggest the current low-interest regime isn’t causing some significant distortions in the economy. The most obvious example is the hot residential real estate market – especially Toronto’s condo scene.

However, the BOC and Ottawa have chosen a different route to deal with that one perceived problem.

The amortization period for government-insured mortgages will be cut back to 25 years from 30 and the maximum value of the home purchase will be capped at one million dollars.

A reduced ratio of mortgage debt to income will also be mandated, plus the amount of credit available through homeowner lines of credit will be lowered from 85% to 80%.

These changes are to be implemented as of July 9.

At the same time as Ottawa is trying to rein in housing demand, Canada Mortgage and Housing Corporation (CMHC) has released data showing tighter rental markets across the land.

CMHC’s spring Rental Market Survey indicates a decline in the overall rental vacancy rate in Canada to 2.5% in April of this year versus the same month last year.

Among the nation’s largest cities, by population, Toronto is in a category of its own with the lowest vacancy rate, 1.5%.

In the next five largest cities in Canada by population, the vacancy rates are all close to the national average - Montreal (2.2%), Vancouver (2.6%), Ottawa (2.1%), Calgary (2.5%) and Edmonton (2.7%).

Among smaller cities across the dominion, the lowest rental rates are in Regina (0.6%), Quebec (0.7%), Saguenay (0.7%) and Guelph (1.0%).

It’s worth noting that Guelph has recorded the best labour market conditions among the nation’s 33 census metropolitan areas (CMAs) over the past several months, due to a combination of strong employment growth (+6.1%) and a low jobless rate (5.7%).

The cities with the highest rental vacancy rates are Saint John, N.B. (8.4%), Windsor (7.7%), Kelowna (5.2%), Moncton and Charlottetown (both 5.0%).

As is presently the case, a high level of immigrant arrivals and positive gains in young adult employment traditionally support rental market demand. Only later do people in those two demographic groupings usually move on to homeownership.

The CMHC report also records that the average rent for a two-bedroom home has risen by 2.1% year over year, which is closely aligned with the inflation rate.

Let’s close with a construction-related measure of how workers are faring in the current inflation climate.

According to Statistics Canada, the construction union wage rate index (including supplements) was 2.4% higher in May 2012 than in the same month of 2011.

That at least gives construction workers some modest advantage in earnings with respect to the +1.2% performance of the overall price level.

Canada inflation – all items CPI vs CORE*
(not seasonally adjusted)
Canada  inflation – all items CPI vs CORE
In Canada, the change in the energy sub-component index was +1.1% year over year in May 2012. Gasoline was +3.3% year over year.

The Canada figure (CPI) is the All Items Consumer Price Index. *Core inflation has been defined by the Bank of Canada. It is the Consumer Price Index (CPI) excluding the eight most volatile components: fruit, vegetables, gasoline, fuel oil, natural gas, intercity transportation, tobacco and mortgage interest costs. It also excludes the effect of changes in indirect taxes on remaining items. The core inflation rate in Canada is monitored with respect to setting interest rate policy. The target range is 1% to 3%.
Data source: Statistics Canada.
Chart: Reed Construction Data - CanaData.
U.S. inflation: all items (CPI-U) vs all items less food and energy
(not seasonally adjusted)
U.S. inflation: all items (CPI-U) vs all items less food and energy
In the U.S., the change in the energy sub-component index was -3.9% year over year in May 2012. Gasoline was -4.0% year over year.

The U.S. figure (CPI-U) is the All Items Consumer Price Index for All Urban Consumers.
Data source: U.S. Bureau of Labor Statistics (Department of Labor).
Chart: Reed Construction Data - CanaData.

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