Statscan - Consumers faced the most volatile price fluctuations in five years in key components of the Consumer Price Index (CPI) during 2008.

For the year as a whole, consumer prices on average increased 2.3%, slightly faster than the annual average increase of 2.2% the year before. But this average masked swings in prices for components such as food and energy, which were two main drivers of inflation.

Early in the year, gasoline prices were the main factor in the increase in the all-items CPI, reflecting the price of crude oil.

Averaged over the 12 months of 2008, gasoline prices in Canada rose a sharp 12.7% compared with the average for the 12 months of 2007. This was the largest annual rise since the 12.8% increase in 2005, when hurricanes Katrina and Rita disrupted the oil market. The rise in gasoline prices contributed significantly to the increase in transportation costs over the year.

By the end of the year, gasoline prices had declined substantially. Pump prices in December 2008 were 25.8% below levels in the same month the year before. This was the largest year-over-year drop since the inception of the gasoline price index in 1949.

The benchmark West Texas Intermediate price for a barrel of crude oil fluctuated substantially over the year. In June, it rose to a high of US$133.93 (CAN$136.17) before retreating to a low of US$41.02 (CAN$50.64) in December. The year-end decline was due to a number of factors, including a worsening US and global economic outlook.

It was the opposite situation when it came to putting food on the table. Over the year, prices for food contributed increasingly to the overall growth in consumer prices. In the fourth quarter of 2008, the food price index accounted for over 60% of the increase in the CPI, about 10 times the more moderate contribution of 6% in the first quarter.

The primary force behind this was a 3.9% annual increase in prices for food purchased from stores. The annual pace of growth in the prices of store-bought food has been increasing since 2003.

Prices for food staples such as bread, rice, flour, milk and eggs rose sharply in 2008. Among the reasons were higher transportation costs resulting from rising gasoline prices, surging commodity prices and increasing demand for food in emerging markets in other countries.

Shelter cost increases eased throughout the year, although they remained the second largest contributor to the increase in the CPI in 2008. Shelter cost increases were driven by higher mortgage interest costs and natural gas prices.

On average, mortgage interest costs were up 8.0% in 2008, primarily a result of increasing housing prices. However, the pace of change slowed through the year, reflecting a slowdown in new housing prices and lower interest rates.

Consumers who bought new passenger vehicles got some relief at car dealerships as prices to purchase passenger vehicles fell 6.9% in 2008. This was the largest drop since the inception of the price index for purchasing passenger vehicles in 1949.

After gaining momentum in the previous three years, the Bank of Canada's core index slowed to a growth rate of 1.7% in 2008, down from 2.1% in 2007 and 1.9% in 2006. The gap between the Bank of Canada's core index and the overall CPI was largely attributed to gasoline prices, which pushed up the CPI but which are not included in the core measure of consumer prices.

Note: This study reviews changes in consumer prices in 2008 as measured by the annual average of the monthly Consumer Price Index. It discusses the drivers of these variations. The focus is on the average for the year, as this indicator is used for indexing many public and private pension plans and programs. Given that the annual average reflects both the rise and decline of consumer prices over the year, some attention is given to intra-annual variations.