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Canada's headline inflation rate pops into positive territory
Nov 18, 2009
Canada's headline inflation rate emerged in October from a four-month period of negative readings as the deflationary pressures coming from movements in the energy component of the CPI dissipated. We expect that the headline inflation rate will move further into positive territory in the fourth quarter as long as the extraordinarily large drops in energy prices that occurred in the fourth quarter of 2008 are not repeated.
Overall prices fell 0.1% in October, with the year-over-year rate up 0.1%. Core prices rose 0.1%, stronger than the consensus forecast for a flat reading, and the year-over-year rate rose to 1.8%, higher than the 1.7% expected by forecasters.
The index fell on the back of lower gasoline prices (-2.2%), falling traveller accommodation costs (-4.6%) and declining mortgage interest costs (-0.6%). Partially offsetting these decreases were higher property taxes (+4.3%), passenger vehicle prices and insurance costs. On a seasonally adjusted basis, the index rose 0.4%, the largest monthly increase since February.
On an annual basis, energy prices were below year-ago levels with gasoline prices down 13.1% from October 2008 and natural gas prices off 30.3%. Despite rising in October, auto prices were 4.1% lower than a year earlier and mortgage interest costs slid 3.1%. Food prices were higher than in October 2008, rising 2.3%, with the price of food at restaurants up 2.7%. Higher auto insurance premiums, homeowners' maintenance and repair costs and a 4.3% rise in property taxes also moderated the effect of lower energy prices on the overall inflation rate.
Markets are keeping their eye on movements in prices outside of energy, and the index excluding the energy components rose marginally to 1.4% in October from 1.3% in September. The increase in the Bank of Canada's core measure was a shade larger than expected but given the excess capacity in the economy we expect that this rate will remain below the 2% medium-term target.
In its October statement, the Bank of Canada noted that the recent strengthening in the Canadian dollar could result in the inflation rate holding below its 2% medium-term target as the stronger currency limits export demand and lowers the cost of imported goods. As long as the Bank views the risks as tilted toward the inflation rate falling short of the medium-term target, they will keep the policy rate at very stimulative levels.
As Canada's economy builds momentum throughout 2010 as the global upturn supports commodity prices and the recovering U.S. economy generates demand for Canadian exports, the amount of slack in the economy will diminish and inflation pressures will gradually pick up. Against this backdrop, we look for the Bank of Canada to begin normalizing interest rates. Increases are unlikely in the first half of 2010 with the first hikes expected to come in the third and fourth quarters of next year.
Dawn Desjardins, Assistant Chief Economist, RBC Economics Research
Surprise drop in U.S. housing starts; inflation up more than expected
October housing starts unexpectedly dropped a sizeable 10.6% to an annualized 529,000 units from 592,000 in September. Expectations going into the report had been for starts to rise modestly by 1.7% to an annualized 600,000. It is possible that with an $8,000 first-time homebuyer subsidy expected to terminate the end of November, builders started to cut back construction activity in anticipation of weakening demand. Congress has recently extended this program to the end of April and has even expanded the program to existing home owners, which bodes well for some of the weakness to reverse in November.
The weakness in housing starts was relatively broadly based. By type of housing unit, single detached homes dropped by 35,000 (6.8%) while multiple units were off 28,000 (34.6%). By area of the country, all major regions fell in October led by an 18.8% drop in the Northeast followed by the Midwest (10.6%), the South (9.6%) and the West (8.5%). Permits also dropped, although by a more moderate 4% to an annualized 552,000.
The drop in starts is disappointing as most other housing market measures have been pointing to improving conditions, although the weakness may have been related to an expected ending of the new home buyer program. However, this report clearly reminds the Fed that the economy is not as yet out of the woods and that policy will need to remain accommodative. Thus, we expect that Fed funds will be held at its current low range of 0% to 0.25% until the fourth quarter of 2010.
Consumer prices — In a separate report out this morning, consumer prices for October rose by a slightly greater-than-expected 0.3% compared to an expected rise of 0.2% going into the report. Similarly, core prices rose 0.2% rather than increasing by a more moderate 0.1%. However, on a year-over-year basis, today’s report suggests little inflation pressure in the system with the overall measure down 0.2% and the core measure up only 1.7%. The overall annual rate is up from -1.3% in September and reflects the fact that sizeable gasoline price declines a year ago are not being repeated this year. In fact, the annual rate of increase will likely continue to drift higher through December as the earlier gasoline price declines extended through the end of 2008.
Paul Ferley, Assistant Chief Economist, RBC Economics Research
To view charts of today's data, go to
http://www.rbc.com/economics/html_calendars/ca/calendar.html (Canada)
http://www.rbc.com/economics/html_calendars/us/calendar.html (United States)
RBC Economics Research contacts:
Paul Ferley, Assistant Chief Economist
Dawn Desjardins, Assistant Chief Economist
Josh Heller, Economist
Go to Financial Markets Daily (pdf) for a daily summary of North American interest rates and foreign exchange rates.
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View trend charts of today's Canadian releases.
View trend charts of today's U.S. releases.
