Friday, January 23, 2009

Inflation Dips in Canada

Inflation dips in Canada; three provinces already at zero or less

By Julian Beltrame, The Canadian Press

OTTAWA - Annual inflation dipped sharply last month to the lowest level in two years as falling gasoline prices continued to drive the consumer price index toward zero and beyond.

Three provinces are already experiencing the rare phenomenon - P.E.I.'s inflation rate hitting zero last month, while Nova Scotia and New Brunswick had inflation rates of negative 0.2 per cent and 0.6 per cent respectively.

Overall, Canada's inflation rate dipped to 1.2 per cent in December, a level not seen since January 2007, and almost a full point below November's two-per-cent rate.

On a month-to-month basis, prices were generally 0.7 per cent lower last month than they were in November.

"This is first and foremost a gas price story now," said Douglas Porter, a senior economist with BMO Capital Markets, noting that excluding gasoline prices inflation would have been 2.6 per cent.

"But starting in the next few months, we'll see a shift where price drops become more broad-based."

Gasoline prices plunged 25.8 per cent in December - the steepest drop since Statistics Canada began the gas index in 1949 - after a 14.4 per cent decline in November.

Earlier this week, the Bank of Canada forecast that the country's inflation rate is likely to slide below zero in the second and third quarters of this year as food prices start reacting to less expensive energy and agricultural commodities, such as wheat.

Economists distinguish between disinflation and deflation. With disinflation, which is a slowing of the rate that prices increase, and deflation - a more dangerous situation in which there's a general decrease in prices over a longer period of time.

Deflation can be harmful to economic growth because buyers tend to delay purchases in the expectation that prices will fall and that, in turn, can create a cycle of lower sales, profits and asset values.

But bank governor Mark Carney said the risk of deflationis "remote."

Porter agrees deflation is unlikely, in part because the lower Canadian dollar will boost the cost of imported goods. But he added that deflation is still a possibility.

"It's not hard to work up a scenario where we repeat what Japan went through in the 1990s, where they did have prolonged deflation," Porter said.

Conference Board chief economist Glen Hodgson says most individuals would regard deflation as a good thing, since it reduces their cost of living, but they shouldn't.

"Japan's experience during the latter part of the 1990s provides critical evidence that prolonged deflation can lead to repeated bouts of recession and a tepid recovery in economic growth. No country wants to go there," Hodgson says.

At the moment, rising food prices remain the main reason inflation in Canada remains on the positive side.

Food at grocery stores cost 7.3 per cent more in December than 12 months earlier, while the cost of fresh vegetables jumped 26.9 per cent and bakery and cereal goods swelled 12.4 per cent.

If not for higher food store prices, inflation would already be at zero, Statistics Canada said.

Of the eight major sub-groups tracked by Statistics Canada, five continued to record increases in prices over the past year, led by food and shelter costs.

Other components showing increases were household furniture and equipment, health and personal care and alcohol and tobacco. Meanwhile, energy, transportation and clothing and footwear fell sharply.

Ironically, 2008 as a whole actually brought a relatively strong 2.3-per-cent increase in the consumer price index. But the trend has been sharply down in the latter quarter of the year.

The annual inflation rate was 1.2 per cent in December, says Statistics Canada. The agency also released rates for major cities, but cautioned that figures may fluctuate widely because they are based on small statistical samples (Previous month in brackets):

-St. John's, N.L., 1.6 (2.6)

-Charlottetown-Summerside, 0.2 (2.3)

-Halifax, -0.1 (1.2)

-Saint John, N.B., -0.7 (0.7)

-Quebec, 0.5 (1.4)

-Montreal 0.7 (1.5)

-Ottawa 1.7 (2.2)

-Toronto 1.7 (2.3)

-Thunder Bay, Ont., 1.9 (2.4)

-Winnipeg, 2.0 (2.6)

-Regina 3.0 (3.6)

-Saskatoon 2.5 (3.1)

-Edmonton 2.0 (2.2)

-Calgary 2.4 (2.4)

-Vancouver 1.3 (2.3)

-Victoria 1.2 (2.1)

The annual inflation rate was 1.2 per cent in December, says Statistics Canada. Here's what happened in the provinces and territories. (Previous month in brackets):

-Newfoundland and Labrador 1.2 (2.4)

-Prince Edward Island 0.0 (2.3)

-Nova Scotia -0.2 (1.3)

-New Brunswick -0.6 (0.6)

-Quebec 0.5 (1.4)

-Ontario 1.5 (2.1)

-Manitoba 1.9 (2.7)

-Saskatchewan 2.6 (3.2)

-Alberta 1.9 (2.4)

-British Columbia 1.2 (2.0)

-Whitehorse, Yukon 3.0 (3.5)

-Yellowknife, N.W.T. 3.1 (4.7)

-Iqaluit, Nunavut 3.4 (3.4)

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