Inflation Unexpectedly Slows in August

By: Daniel Rattanamahattana on September 22, 2012

After the latest Bank of Canada update to the country, Mark Carney made it clear that the rise in interest rates would be tied to the rise in inflation. His talk was that as Canada is beginning to return to full economic output in the aftermath of the recession that inflation will begin to raise prices and in turn, he will be forced to raise interest rates to help prop up the economy. But the latest numbers for inflation show that full output capacity may not be as full as Carney wants.

The Consumer Price Index (CPI) used to track inflation rose 1.2 percent for August which was down from the 1.3 percent in July. Not much of a drop but still a sign that inflation may not be pressing as hard on the economy as Carney and other financial gurus may expect. The Bank of Canada previously suggested that interest rates will rise as inflation returns to the healthy 2 percent over the next year but many experts say that language is likely to be changed at the bank’s next fiscal update scheduled for October 23.

The slower rise in inflation was supported by other economic indicators. Natural gas appears to be the one commodity on the downswing, plunging 14 percent in August from a year earlier; unfortunately for most Canadians oil and other resources saw another rise, with gasoline at the pumps rising 2.2 percent. Mortgage interest costs actually dropped 1.8 percent and many materials for certain products such as women’s clothing came down 3.4 percent, perhaps suggesting retail sales will also be lower when they are next released. The one rise that appeared across the board was in food; Canadians can expect to pay 5.7 percent more for meat this coming fall and dining out will also cost a little extra too.

Other reports of a record trade deficit, falling factory sales, declines in labour productivity, building permits; and an overall apathetic consumer spending attitude have all contributed to keeping inflation from going up. Sobeys CEO Mark Paulin says he expects inflation to remain relatively stable for some time as consumers are unwilling, in many cases unable to pay more for everyday items; suggesting his stores will not be raising prices dramatically in the near term.

Overall some weaker economic data has helped keep inflation in check and put pressure on Mark Carney to perhaps hold the till and steady the course. Canadians will be eagerly awaiting his next indicator of what Canada’s future inflation and interest rates will hold on October 23.