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Posted Thursday May 16, 2019


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CPI

Gas prices, boosted by carbon levies, lift consumer prices

CPI rose by 0.4% m-o-m in April, an increase that was in line with the consensus expectation; Excluding gasoline, consumer prices were flat in the month; From a year ago, inflation was 2.0%, as expected, while the core measures of inflation were a bit lower than anticipated - by David Watt

Facts

Consumer prices rose by 0.4% m-o-m in April. This was in line with the consensus expectation. Much of the increase was due to a 10% increase in gasoline prices in the month, in part boosted by the introduction of carbon levies in several provinces. Excluding energy, consumer prices were flat on the month. Many of the changes in other price aggregates largely offset one another. Hence, food prices, and travel related costs declined, while clothing prices increased.

The rate of inflation increased to 2.0% y-o-y, from the prior 1.9%. This was also an as expected result. Meanwhile, the three measures of core inflation were a touch weaker than expected. For example, CPI Core-Median came in at 1.9% y-o-y (consensus: 2.0%), and CPI Core-Trim was 2.0% y-o-y (consensus: 2.0%). Meanwhile, CPI Core-Common was an as expected 1.8% y-o-y. The average of the three core inflation measures fell slightly to 1.9% y-o-y from 2.0%.

Implications

Both the headline and core inflation rates continue to remain around the 2% annual level, are thus in line with the inflation target.

In our view, much of the upward pressure on prices has come from factors that are not linked to the economic cycle. Instead, many of the price increases are on goods or services that households have difficulty avoiding, with the result that disposable incomes are squeezed. For example, over the past few years, in addition to rising oil prices, fuel prices have been affected by the implementation of various carbon levies. This was also a factor in the increase in gasoline prices in April, as the Federal Government imposed carbon levies in provinces that had not implemented carbon pricing systems of their own.

As well, mortgage interest costs have been on a steady upswing as interest rates rose. In April, mortgage interest costs increased by 0.6% m-o-m, the 14th straight month that they have increased by more than 0.5%. As a result, mortgage interest costs are now up by 8.2% y-o-y, the fastest rate of increase since mid-2008.

Other prices that have been rising impose costs that are difficult to avoid, such as home and auto insurance. These increases have reflected rising claims that can be attributed to more frequent extreme weather events, and rising repair costs, and the impact of an increase in the number of accidents related to distracted driving.

Additionally, there is some evidence that Canada's tariffs on imports of some consumer products from the US are lifting the prices of some food purchased from stores.

In response to these increased fees/charges/prices, consumer spending has slowed, as more disposable income has been allocated to these rising expenditures.

There are some mixed signals on the performance of the economy in early 2019. There are some signs consistent with sluggish economic growth, including weak consumer and business confidence, surveys showing that factory sector activity remains soft, and the slow rate of growth of hours worked. However, there are also signs that economy is rebounding from a soft patch, most notably the strength of the job market, and signs that construction activity has rebounded from a period of weakness. With the rate of inflation remaining around target, we think that the Bank of Canada will remain on hold, in a neutral and data dependent stance.

David Watt is Chief Economist, HSBC Canada









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