The year-over-year increase in the all-items Consumer Price Index in Canada dropped for the third straight month in February 2008 to only +1.8%. (The all-items CPI percent change is often referred to as the “headline” inflation rate.) Furthermore, the “core” inflation rate was also quite restrained in the latest month, at only +1.5%. Therefore, both key measures of inflation were below the mid-point of the Bank of Canada’s target range that runs from +1.0% to +3.0%.

Less than Half the Inflation Rate in the U.S.
Placing Canada’s price-change performance in context, it is less than one-half of the overall inflation rate in the United States (+4.0%). However, lest Canadians get too complacent, the month-to-month change in the all-items index was +0.4% in February (versus January) and the month-to-month change in the core rate was +0.5%. These are not alarming levels, but they indicate some potential for an acceleration in inflation. By way of comparison, the all-items month-to-month change in January was -0.2%, thanks to the decline in the Goods and Services Tax from 6% to 5%.

High-valued Currency Lowers Prices in Several Areas
The high-valued Canadian dollar has played a significant role in keeping Canadian inflation under wraps. It is a major part of the reason that fresh vegetables (mainly imported from the U.S.) have dropped 17% in price, year over year, and that fresh fruit  has also declined significantly (-15%) in price.

Vehicle purchase and lease prices have fallen 7% year over year as manufacturers have lowered their suggested retail prices, to bring them in line with levels across the border. Carmakers have also continued, and in some cases augmented, their discount packages.

Computer equipment and supplies is the other major area of price decline (-15%). Statistics Canada credits this to advances in technology, plus aggressive competition in this market.

Upward Price Pressure from the Old Standbys
Upward price momentum is coming from the old standbys – gasoline and housing costs. However, gasoline prices exerted less upward pressure in the latest month (+17%) than in the previous month (+21%). The underlying base with respect to gasoline prices is the international price of oil, which has climbed to around $100 U.S. per barrel from $60 last year at this time.

On the housing front, it is higher home prices that are pushing up the general inflation rate rather than mortgage rates. In fact, interest rates remain quite restrained. The Bank of Canada (BOC), keeping in mind the country’s success in tamping down inflation, has lowered its key overnight rate to 3.50% from a high of 4.50% last fall. However, this is not keeping up with cuts in the U.S., where the federal funds rate has been knocked down by 300 basis points since last August.

Given that inflation remains in check in Canada, the BOC does have the option to lower rates further, if it decides that action must be taken to counter the negative effects of: (1) the U.S. slowdown; and (2) a Canadian dollar that is valued too high for manufacturers trying to sell into the U.S. market.

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