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With gas prices ballooning, inflation rate climbs to two per cent in April

OTTAWA - Canada's annual inflation rate climbed to its highest level in two years, reaching 2.0 per cent in April, as an unusually big jump in energy prices — particularly gasoline and natural gas — helped push up consumer prices.

The steep 0.5 percentage point increase from the previous month put the annual rate back at what the Bank of Canada considers the optimal level.

Given that inflation was as low as 0.7 per cent as recently as October, the dramatic climb in recent months would normally signal the beginning of an interest rate increase cycle for the Bank of Canada, whose principal mandate is to keep inflation at two per cent.

But governor Stephen Poloz has already said he will "look through" the current rise in inflation as being a temporary phenomenon driven by consumer items related to energy.

The Canadian dollar barely moved in reaction to the inflation report, reflecting that the increase was dead on economists' expectations.

"In some ways this is almost ideal for the bank," said Doug Porter, chief economist with BMO Capital Markets.

"But of course this is a classic case of be careful what you wish for. The last thing they want to see happen is to have inflation get away from them, but at least they can stop fretting about inflation dipping into deflation territory."

David Madani of Capital Economics said the central bank has more important things to worry about than price pressures getting out of hand.

"With the Bank of Canada focused on the struggling economy and the downside risks to underlying inflation, it is unlikely to alter its neutral stance on the direction of interest rates," he said.

What will give the central bank comfort, said Porter, is that core inflation index, which excludes volatile items such as gasoline and some fresh fruits and vegetables, remained well contained at 1.4 per cent in April.

On a month-to-month basis, consumers paid 0.3 per cent more than they did in March.

Energy was the main driver in the increase in the monthly and annual rates, with gasoline costing 6.6 per cent more in April than a year ago, natural gas 26.6 per cent more, and electricity coming in 4.6 per cent higher.

Excluding the energy component, inflation was steady 1.4 per cent, mirroring the core reading.

"That tells us that energy has been the big driver here," noted Porter, "not food, not clothing, not cars."

Price variations were indeed modest for most other consumer goods tracked by Statistics Canada.

Food, which is a key component in the basket of goods and services measured by the agency, rose 1.9 per cent from a year ago, a pick-up from March's 1.5 per cent reading.

Most analysts and the central bank don't expect underlying inflation will return to the desired two-per-cent until early in 2016, about the time markets expect the central bank will begin increasing interest rates to keep inflation in check.

Meanwhile, shelter costs advanced 3.3 per cent, transportation costs increased 2.8 per cent and consumers paid 1.5 per cent more for automobiles in April than they did a year ago. Tobacco products jumped 8.2 per cent, largely related to the tax increase announced in the federal budget in February.

But there were also price decreases registered, including a drop of 3.7 per cent for hotels, 1.3 per cent for women's clothing, 3.2 per cent on prescribed medicines, 4.5 per cent for digital computing equipment and a three per cent dip in prices for household appliances.

Regionally, British Columbia registered the biggest increase in the annual rate, rising from 0.1 per cent in March to 1.5 per cent in April.

Inflation in Alberta went the other way, falling from 3.9 per cent in March to 2.7 per cent in April.

The Canadian Press


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