CONSUMER PRICES RISE 1.4%

Consumer prices rise 1.4 per cent

HEATHER SCOFFIELD

Globe and Mail Update

March 19, 2009 at 7:54 AM EDT

Ottawa - Finally some economic news that doesn't prompt a recall of past catastrophe.

Consumer prices showed some surprising signs of life in February, dispelling fears of deflation gaining a foothold in the Canadian economy. Prices rose 1.4 per cent from a year earlier, driven by higher food and shelter costs, Statistics Canada said Thursday.

That's higher than the 1.1 per cent pace measured in January, and greater than market expectations for a 1.0 per cent inflation rate for February.

Core inflation was 1.9 per cent on the year, also higher than economists' forecasts for 1.1 per cent. Core inflation excludes the most volatile prices and which the Bank of Canada watches closely to determine the underlying nature of inflationary pressure.

The surprise upward pressure was a relief to economists who have become concerned that the recession was undermining pricing power so much that deflation would take hold in Canada. They still warned of falling prices in the months ahead, but suggested that a dip would be short-lived and would not resemble a dangerous deflationary spiral.

"Barring an explosive spike in pump prices over the spring, headline [total] inflation is poised to dip into negative territory for a brief spell as the huge gasoline increases of last spring drop out of the calculation," said Douglas Porter, deputy chief economist at BMO Nesbitt Burns.

"This upside surprise shows that deflation remains a remote risk in Canada at this point, especially with the softer Canadian dollar adding pressure to some import costs."

Still, inflation is well below the central bank's target of 2 per cent, he added. And that leaves lots of room for the Bank of Canada to "dabble" in new measures that will loosen monetary conditions in Canada in the months ahead, he said.

On a month-over-month basis, consumer prices rose 0.7 per cent, after contracting 0.3 per cent a month earlier. Core inflation was 0.5 per cent in February, after a decline of 0.4 per cent a month earlier.

The main contributors to the month-over-month turnaround were gasoline, which was 5.6 per cent more expensive than in January, and travel tours, which were 14.5 per cent more expensive.

On a seasonally adjusted basis, which Statscan believes is a more reliable indicator of monthly trends in pricing, consumer prices rose 0.4 per cent in February, putting an end to a four-month streak of declines. Higher food and transportation costs were the main factors.

Core inflation was 0.4 per cent on the month, seasonally adjusted, because of a rise in the price of cars.

For the year as a whole, inflation was able to reach 1.4 per cent mainly because a 5.0 per cent increase in mortgage costs and a 25.8 per cent rise in the price of fresh vegetables as well as rising natural gas prices that more than offset cheaper gasoline, fuel and cars, Statscan said.

Food prices were 7.4 per cent higher than a year ago, the largest jump for food since 1986, economists at TD Securities noted.

As has been the case for much of the last year, volatile gasoline prices distorted the overall inflation picture. In February, gasoline was 19.7 per cent lower than a year ago, even if it was more expensive than a month earlier. But if gasoline is excluded from the consumer price index, inflation was a strong 2.5 per cent year over year.

By region, the Prairies saw the fastest increases in consumer prices in February compared to a year ago, mainly because of higher mortgage interest costs, Statscan said.

TD Securities economists also warned that the faster inflation numbers wouldn't last.

"The takeaway from this report is that while prices were surprisingly firm in February, it is unlikely to remain a theme going forward," they said in a note to clients.

"The Canadian economy is unambiguously weak and the slack emerging in the economy is sure to keep a lid on prices as demand wanes."

 Philip Beer

Regional Vice President

Street Capital Financial Corporation

2401-1 Yonge Street

Toronto, Ontario

M5E 1E5

Direct line 1-905-441-2626

Toll Free 1-877-416-STREET (7873) ext. 522

Direct Fax 1-905-655-9728

Toll Free Fax 1-877-905-STREET (7873)

Source Philip Beer, Globe & Mail and Heather Scofield

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