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Core inflation rate rises in Canada

(Oct. 21, 2011) -- "The core rate ran much hotter than expected rising 0.5 percent in the month, more than double the expected 0.2 percent rise," said Desjardins. "The year-over-year headline inflation rate edged up to 3.2 percent in September from August's 3.1 percent pace."

TORONTO — The September consumer price report for Canada showed the headline index rose 0.2 percent in the month, which was in line with expectations, RBC Economics Research reported today.

“However, the core rate ran much hotter than expected rising 0.5 percent in the month, more than double the expected 0.2 percent rise,” said Dawn Desjardins, assistant chief economist. “The year-over-year headline inflation rate edged up to 3.2 percent in September from August’s 3.1 percent pace. The annual core rate was 2.2 percent, above the 1.9 percent recorded in August.”

Women’s clothing prices spurted by 10.5 percent in the month of September, which, supplemented by rising tuition fees (4.2 percent), car prices, and air transportation costs, boosted the inflation rates. Financial services costs also rose 4.8 percent in the month. Moderating these increases were declines in electricity costs (which partially reversed increases in July and August) and insurance costs.

The rise in the headline rate was also dampened by declining prices for fresh fruit and vegetables, and gasoline, three items that are not included in the core measure. The unexpected rise in vehicle prices and larger than seasonal increase in clothing prices accounted for about 0.2 percent of the monthly increase.

“We expected that with the end of the supply-chain constraints in the auto industry, prices would move lower as dealers put discounts in place,” said Desjardins.

Compared to September 2010, prices for gasoline were up 22.7 percent, fuel oil prices rose 27.4 percent, vehicle insurance premiums rose 5.6 percent, and food from restaurants and meat prices were also higher. At the same time, mortgage interest costs, furniture prices, computer equipment, and natural gas prices declined. On balance, the annual inflation rates, both headline and core, moved higher in the month, said Desjardins.

The overall inflation rate averaged 3.0 percent in the third quarter of 2011, slightly higher than the Bank of Canada’s July forecast of 2.8 percent.

“With the gradual deceleration in gasoline price inflation that began in the summer likely to continue, the headline rate is forecasted to fall in the fourth quarter of the year and move closer to the bank’s 2 percent target,” said Desjardins. “Additionally, the economy’s slower than expected second-quarter performance will limit price pressures in the near term, thereby resulting in the core measure (which excludes gasoline) also easing.

“Recent data indicate that the pace of GDP growth rebounded in the third quarter after a disappointing 0.4 percent drop in the second quarter,” she explained. “However, growth is likely to remain modest with external developments weighing on momentum. With the economy growing at a slower than expected pace during the middle part of 2011, the bank’s estimate of the size of the output gap likely increased, suggesting that there is more downside to the outlook for inflation than there was when it released its July forecast.

“Our expectation is that the bank will push forward the estimate of when the output gap will be closed until 2013 from the earlier projection of mid-2012,” said Desjardins. “With the pace of growth expected to remain modest going forward, the Bank is likely to keep policy accommodative in an effort to mitigate the downside risks to the outlook emanating from outside of Canada’s borders.

“Next week’s Bank of Canada rate decision and Monetary Policy Report will provide an update to the Bank’s forecasts, and we expect these will convey the sentiment that the Bank is committed to maintaining the current 1 percent rate until the external headwinds subside,” she added.

SOURCE: RBC Economics Research press release

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About Greg Gerber

Greg Gerber is a freelance writer and podcaster who has been writing about the RV industry since 2000. He is the former editor of RV Daily Report.

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