Crude oil prices are on the rise again, so higher gasoline prices are likely in store in the coming months, says an analyst assessing rising pace of inflation.
Year-over-year gains in April result from 8.4% increase in energy prices
For now, forget all that talk about a possible interest rate cut.
The Canadian economy has been struggling to get a firm footing coming out of a severe winter, but private-sector analysts are still forecasting stronger first-quarter growth than even the Bank of Canada had ventured to predict.
In fact, until only recently, the central bank had been fretting more about the risk of deflation than weak growth. Now, prices are on their way back up.
The pace of inflation, the main indicator that guides the bank’s monetary policy, jumped by an annual rate of two per cent in April, Statistics Canada reported Friday. That was in line with economists’ forecasts, and follows a year-overyear gain of 1.5 per cent the previous month.
It’s the first time Canada’s consumer price index — the basket of items tracked by the federal data agency — has reached the two per cent level since April 2012.
“It’s been quite a spell of subtarget inflation in Canada and it looks like that’s over,” said Douglas Porter, chief economist at BMO Capital Markets.
The year-over-year gains in April were propelled by a surge of 8.4 per cent in energy costs, with the most notable gains seen in Ontario, where hikes of nearly 40 per cent in natural gas rates took effect in April.
On average, natural gas prices leaped 26 per cent last month from April 2013, while electricity rose 4.6 per cent and fuel oil was up 9.3 per cent, the federal agency said.
The cost of gas at the pumps increased 6.6 per cent over the year from a 1.4 per cent annual gain in March.
David Madini, at Capital Economics, said “crude oil prices are on the rise again, so higher gasoline prices are likely in store in the com- ing months.”
Also higher in April were food prices, advancing 1.9 per cent from an annual gain of 1.5 per cent in March. The cost of food purchased at stores was up 1.7 per cent over the same period, the same yearover-year increase as in March.
Statistics Canada’s core inflation index — stripping out some volatile items, such as specific food and energy products — edged up to 1.4 per cent in April from an annual rate of 1.3 per cent the previous month, also matching market estimates.
The core reading is closely watched by the central bank to gauge the direction of price movements and underlying trends farther down the road.
On a monthly basis, CPI was up 0.2 per cent in April, down from a 0.3 per cent advance in March.
April’s overall two per cent rise in prices matches the Bank of Canada’s inflation target — the midway point of its one to three per cent comfort zone.
“This [increase] is not unique to Canada, by the way,” said BMO’s Porter. “We’re seeing this in most of the industrialized world — where prices are getting back to normal now. The U.S. was right on two per cent in the month.”
Late last year, central bank governor Stephen Poloz dropped policymakers’ rate-tightening basis, in favour of a neutral stance. That led to speculation the bank’s benchmark lending rate — at one per cent since September 2010 — could eventually be cut if inflation remained low and the economy stagnated.
“This will be the first time in two years that we’re up to two per cent, so it’s been quite a spell since a subtarget inflation,” Porter said.
“I think the biggest picture is that the Canadian consumer is still hanging in there, still adding to the economy,” he added. “Despite all the hand-wringing over household debt, we’re still seeing moderate gains in consumer spending and retail sales.”
As for the possibility of rates eventually going down, rather than up, any time soon, Porter said “the chances of that are fading fast.”
Nick Exarhos, an economist at CIBC World Markets, said “though the numbers came in as expected, prices Canadians are facing at checkout counters are steadily creeping higher ... that doesn’t suggest that a change in official policy is imminent.”
“We are well away from the critical one per cent (inflation) threshold that spurred earlier rate-cut chatter, and on course for a first rate hike to come sometime in mid-2015.”
The Bank of Canada’s next interest rate decision will come on June 4.
Meanwhile next Friday, Statistics Canada releases gross domestic product numbers for March and the first quarter of 2014.