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Canada's inflation rate dips to lowest level in two years
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Canada's inflation rate fell to its lowest level in nearly two years last month as gasoline prices dropped amid a struggling global economy, Statistics Canada said Friday.
May's inflation rate fell to 1.2 per cent, down from two per cent in April, a steeper decline than economists had predicted.
Last month's lower energy costs and moderation in the price hikes of other goods drove the consumer price index to its lowest level since June 2010.
The Toronto stock market only moved slightly on the news, finishing up 18.66 points to 11,426.98. It had dropped 350 points the previous day.
The loonie, meanwhile, took flight on the numbers Friday, rising 0.45 of a cent to 97.60 cents.
While Canadians paid less for gasoline as world oil prices fell, video equipment was also less expensive and some clothing items were lower as well.
May also saw prices fall outright on a month-to-month basis, meaning the basket of about 175 goods and services that Statistics Canada surveys cost 0.1 per cent less overall in May than it had in April.
Bank of Canada Governor Mark Carney said this week he expected prices to dip below his two per cent target in the short term.
But Carney also said that the underlying core rate, which excludes volatile items such as energy, would hover near the target.
He was right on both counts, as core slipped to 1.8 per cent from 2.1 in April.
May's lower inflation wasn't a surprise because falling world oil prices led to less expensive gasoline at the pumps for consumers, RBC assistant chief economist Paul Ferley told CTV News Channel Friday.
"The core (rate) . . . moderation there as well, but still remaining fairly close to the Bank of Canada's mid-range target of two per cent," he said.
Lower oil prices will have an effect on the country's exports, but it's unlikely there will be "any pullback" in terms of investment in the energy sector, he said.
"It's not for sure that these lower levels are going to be maintained," Ferley said.
"I think at the moment, this weakness is reflecting concern about developments in Europe and with what that implies for global growth," he said.
World markets are taking a "relatively pessimistic" read, but that could change as European leaders continue to hold meetings about the eurozone's economic direction, Ferley said.
According to Craig Alexander, chief economist with the TD Bank Financial Group, the headline rate of inflation in May reflected the fact that a year ago gasoline prices were so high.
“The real problem is that when we go forward, gasoline prices did fall in the months that followed last year. So that headline rate of inflation is going to creep back up… towards the 2 per cent rate before long,” Alexander said.
“In other words, don’t get too excited about the fact that inflation numbers for May came in low, it isn’t going to last very long,” he added.
Moderating consumer prices, the world economic outlook and Ottawa's tightening of mortgage rules Thursday will likely lower any chance the central bank will hike the overnight interest rate anytime soon.
Several economists also said this week that given the U.S. Federal Reserve's continuing dovish position, Carney may keep the bank's policy setting at one per cent until 2014.
But Alexander predicted that interest rates are likely to increase modestly by 2013.
Gasoline prices last month were 2.3 per cent lower than May 2011, the first outright decline in 23 months.
Gas prices also dropped on a monthly basis, dipping 3.5 per cent from April.
As well, women's clothing slipped 3.2 per cent from last May, fresh vegetables cost 7.1 per cent less, video equipment plunged 13.3 per cent and the price of natural gas fell 16.6 per cent.
Price increases in May included food, up 2.5 per cent; electricity, 5.4 per cent higher; meat, up 6.1 per cent; homeowner replacement costs, up 2.4 per cent, and automobiles, which cost 1.7 per cent more than last year.
In all, seven of the eight major components tracked by Statistics Canada rose, but many by less than a month earlier.
On a monthly basis, women's clothing, natural gas, automobiles and bakery products were all less expensive in May than they were in April, although there were also increases, particularly in traveller accommodation, fresh fruit, meat and electricity.
Regionally, inflation moderated in all provinces last month. Newfoundland and Labrador continued to post the highest inflation in the country at 2.5, while Alberta remained the lowest at 0.4 per cent.
With files from The Canadian Press
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