Shortly after last year's worry about what Canada's persistent disinflation might portend, the country's inflation rate started rising faster than expectations. Indeed, Canada's consumer price index (CPI) has now surpassed the consensus forecast for three consecutive months.
Although consumers often dread the prospect of rising prices, disinflation, or even outright deflation, can wreak far more havoc on an economy than inflation. And when a country is emerging from a period of economic weakness, inflation can be one of the first signs that an economy is revving up again.
According to Statistics Canada (StatCan), non-seasonally adjusted inflation rose 0.6 percent month over month, surpassing the consensus forecast by a substantial two-tenths of a percentage point, which was the same margin in each of the two prior months.
While Canada's inflation may be perking up, on a year-over-basis it's still toward the low end of the 1 percent to 3 percent target range that the Bank of Canada (BoC) uses to guide its monetary policy. The CPI rose 1.5 percent year over year in March, which was one-tenth of a point better than projected.
The goal of the BoC's monetary policy is to target the midpoint of the aforementioned range, though the CPI has not increased at a rate anywhere near 2 percent since April 2012. Instead, it's occupied the low end of the BoC's control range, even dipping below the 1 percent threshold seven times since November 2012, hence the central bank's concern about persistent disinflation.
Meanwhile, the core CPI, which excludes volatile items such as food and energy, climbed 1.3 percent year over year, which was in line with the consensus.
StatCan observed that the rise in CPI was led by energy prices, which climbed 4.6 percent year over year. In the BoC's latest Monetary Policy Report, the central bank said that the total CPI will likely outpace core CPI ! in the coming quarters due to higher energy prices at the consumer level.
Gasoline prices were up 1.4 percent, while the natural gas index increased 17.9 percent, following a 5.5 percent rise in February. Prices for electricity rose 5.0 percent, while prices for fuel oil increased 9.1 percent.
Of the eight major CPI components, six posted price gains on a year-over-year basis, particularly shelter, transportation and food.
Shelter costs were up 2.7 percent, after climbing 2.2 percent the previous month. StatCan notes that the increase in March was the largest since December 2010.
Prices for transportation rose 1.7 percent year over year, following a 0.4 percent rise in February.
And food prices were up 1.5 percent versus a year ago. Economists with CIBC World Markets expect food prices will continue to head higher in the coming months because key food-producing regions were disrupted by extreme winter weather. And the fact that Canada imports much of its food means that consumers will pay more due to the lower exchange rate.
The aforementioned BoC report was published just prior to the latest CPI data. However, the central bank's projections still seem in line with what the latest data suggest. While the bank believes core inflation will remain well below 2 percent at year end, it expects the total CPI to come much closer to its 2 percent target.
Even so, the BoC's near-term growth expectations have become somewhat more muted as of late, with its forecast for full-year 2014 gross domestic product (GDP) growth revised slightly lower to 2.3 percent from 2.5 percent.
The good news is that the lower estimate is largely the result of the unusually harsh winter's effect on first-quarter growth, rather than something more ominous. In the four quarters thereafter, the bank projects the economy will grow at a 2.5 percent rate, or even slightly higher.
In fact, the bank's forecast for full-year 2015 is for GDP growth of 2.5 percent. That's si! gnificant! because this rate was previously identified as the minimum growth necessary to remove excess capacity from the economy.
So Canada's economy is sustaining its upward trend, even if growth isn't quite as robust as we'd like it to be.
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