CPI ’s 2% solution
Why there won’t be a bank rate cut any time soon.
OTTAWA • For now, forget all that talk about a possible interest rate cut.
The Canadian economy has been struggling to get a firm footing coming out of a severe winter, but private-sector analysts are still forecasting stronger first-quarter growth than even the Bank of Canada had ventured to predict.
In fact, until only recently, the central bank had been fretting more about the risk of deflation than weak growth. Now, prices are on their way back up.
The pace of inflation, the main indicator that informs the bank’s monetary policy, jumped by an annual rate of 2% in April, Statistics Canada reported Friday. That was in line with economists’ forecasts, and follows a year-over-year gain of 1.5% the previous month.
It’s the first time Canada’s consumer price index — the basket of items tracked by the federal data agency — has reached the 2% level since April 2012.
“It’s been quite a spell of subtarget inflation in Canada and it looks like that’s over,” said Douglas Porter, chief economist at BMO Capital Markets.
The year-over-year gains in April were propelled by a surge of 8.4% in energy costs, with the most notable gains seen in Ontario, where hikes of nearly 40% in natural gas rates took effect in April.
On average, natural gas prices leapt 26% last month from April 2013, while electricity rose 4.6% and fuel oil was up 9.3%, the federal agency said.
The cost of gas at the pumps increased 6.6% over the year from a 1.4% annual gain in March.
Capital Economics’ David Madini said “crude oil prices are on the rise again, so higher gasoline prices are likely in store in the coming months.”
Also higher in April were food prices, advancing 1.9% from an annual gain of 1.5% in March. The cost of food purchased at stores was up 1.7% over the same period, the same year-over-year increase as in March.
Statistics Canada’s core inflation index — stripping out some volatile items, such as specific food and energy products — edged up to 1.4% in April from an annual rate of 1.3% the previous month, also matching market estimates.
The core reading is closely watched by the central bank to gauge the direction of price movements and underlying trends farther down the road.
On a monthly basis, CPI was up 0.2% in April, down from a 0.3% advance in March.
April’s overall 2% rise in prices matches the Bank of Canada’s inflation target — the midway point of its 1% to 3% comfort zone.
“This [increase] is not unique to Canada, by the way,” said BMO’s Mr. Porter. “We’re seeing this in most of the industrialized world — where prices are getting back to normal now. The U.S. was right on 2% in the month.”
Late l ast year, central bank governor Stephen Poloz dropped policymakers’ ratetightening basis, in favour of a neutral stance. That led to speculation the bank’s benchmark lending rate — at 1% since September 2010 — could eventually be cut if inflation remained low and the economy stagnated.
“This will be the first time in two years that we’re up to 2%, so it’s been quite a spell since a sub-target inflation,” Mr. Porter said.
“I think the biggest picture is that the Canadian consumer is still hanging in there, still adding to the economy,” he added. “Despite all the handwringing over household debt, we’re still seeing moderate gains in consumer spending and retail sales.”
As for the possibility of rates eventually going down, rather than up, any time soon, Mr. Porter said “the chances of that are fading fast.”
Nick Exarhos, an economist at CIBC World Markets, said “though the numbers came in as expected, prices Canadians are facing at checkout counters are steadily creeping higher ... that doesn’t suggest that a change in official policy is imminent.”
“We are well away from the critical 1% [inflation] threshold that spurred earlier ratecut chatter, and on course for a first rate hike to come sometime in mid-2015.”
The Bank of Canada’s next interest rate decision will come on June 4.
Meanwhile next Friday, Statistics Canada releases gross domestic product numbers for March and the first-quarter of 2014.