Canada's headline inflation rate at lowest since 1994 - RBC Economics

7:00 AM EDT
Canada's annual inflation rate at 0.4% in April - marked lowest in almost fifteen years
The April consumer price report showed a monthly decline in unadjusted prices of 0.1%. The bigger news was the slump in the headline inflation rate to 0.4% on a year-over-year basis as the 0.1% decrease in April 2009 replaced the 0.8% surge a year ago that was fueled by a spike in energy prices. Market forecasts were for a 0.6% annual increase in the headline rate. The seasonally adjusted index fell 0.3% in April. The Bank of Canada's core measure rose an as-expected 0.1% in the month on an unadjusted basis, slower than March's 0.3% rise and February's 0.5% increase. Seasonally adjusted, the core index increased by 0.2% in April. The core inflation rate edged back down to 1.8% from 2% in March on a year-over-year basis. 

Implications
The headline inflation rate decreased on the month despite a 1% rise in gasoline prices as falling prices for natural gas, women's clothing and the purchase/lease of motor vehicles swamped the effect of the rise in gas prices. On a year-over-year basis however gasoline prices were much lower, having fallen 24.7% from last April's elevated level. Prices for motor vehicles and other fuels as well as homeowners' replacement costs were also running lower than a year earlier. Higher food prices (+7.1%), mortgage interest costs and vehicle insurance premiums than in April 2008 kept the headline rate in positive territory.

Mortgage interest costs were 3.2% higher than in April 2008, a marked slowing from the peak 9% increase recorded in June 2008. Falling mortgage rates and housing prices have dampened the pace of increase. 

The downward trajectory for the headline inflation rate picked up speed in April and, with the big monthly increases in energy prices last summer  unlikely to be replicated this year, we anticipate the inflation rate will slip into negative territory in the months ahead. Gyrations in energy prices are having a significant impact on the overall level of prices, and it is worth noting that excluding the energy component, prices were 2.4% higher than in April 2008. The core measure, which aims to provide a read on underlying price pressures, slipped back below the Bank of Canada's official 2% target. The marked contraction in the economy in the first quarter and rising unemployment rate points to a growing output gap which will exert further downward pressure on core prices.

The steady decline in the headline inflation rate is in line with the Bank of Canada's April forecast which looks for the rate to fall into negative territory mid-year and then rise to average 1% in the final quarter of the year. By mid-2011, the Bank forecasts that both the headline and core inflation rates will be back at the 2% target.  For policy, it is the medium-term outlook for inflation that is important and should the odds shift away from that rate hitting its target, less traditional measures of monetary policy stimulus will likely be employed. 

Data details

  •  
    • Canada's all-items inflation fell 0.1% in April and was 0.4% higher than a year earlier
    • The BoC's measure of core, which excludes the eight most volatile components and the effects of changes in indirect taxes, edged up by 0.1% in the month and was 1.8% higher than a year earlier

RBC contacts:
Dawn Desjardins, Assistant Chief Economist (416) 974-6919
For more economic research, visit our web site at http://www.rbccm.com/0,,cid-15911_,00.html.
The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.

 

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