Alia McMullen, Financial Post
Canada's inflation rate hit a 56-year low Wednesday and will likely slip further in the coming months as the index continues to react to last year's record surge in oil prices. But while overall prices appeared somewhat deflationary in July, consumers would be forgiven for not noticing because core inflation, which excludes energy, remains higher than a year ago.
"Many Canadians are unlikely to feel their cost of living declined," said Sébastien Lavoie, an economist at Laurentian Bank Securities. He said prices of frequently purchased goods, such as food and parking, remained higher, while those of big-ticket durable goods, including cars and furniture, had fallen.
"The problem is that unless you buy these durable goods -- less likely amid the labour-market woes and increasing financial tensions -- you don't benefit from these lower prices," he said.
The all-items consumer price index declined by 0.9% in July compared with a year earlier, worse than the 0.3% drop recorded in June, Statistics Canada figures showed. It was the lowest reading since 1953 and was largely attributed to the fact gasoline prices were 23.4% lower than in July last year, when the cost of a barrel
of oil peaked at about US$147.
On the other hand, core inflation, which excludes energy, was rather resilient given the economy has been in recession. Core prices were 1.8% higher than in July 2008, down one basis point from last month but still only slightly below the Bank of Canada's inflation target of 2%.
Food prices eased from the previous month, but remained 5% higher than a year earlier, while the cost of recreation, education and reading was up 1.1% compared with 0.9% previously.
"Strip out energy volatility, and it becomes apparent that Canada doesn't have a problem with either inflation or deflation," said Krishen Rangasamy, an economist at CIBC World Markets.
Mr. Rangasamy said prices were expected to ease further in the coming months because of last year's higher oil prices, downwards pressure on some items from the recession and the recent rise in the Canadian dollar, which makes imported goods cheaper. This would allow the Bank of Canada to continue to stimulate the economy with record low interest rates and keep its conditional promise to hold the benchmark rate at 0.25% until mid-2010.
Despite an anticipated further softening in prices, economists do not expect deflation to get a stranglehold on Canada. Stewart Hall, an economist at HSBC Securities said signs of economic recovery and a decline in oil prices in the second half of last year are expected to drive headline inflation back into positive territory by the end of this year.
He said a rise in Canada's composite leading index confirmed projections the recession likely ended in the current quarter were likely correct. The leading index for July rose for the first time in almost a year Wednesday to be up by 0.4%, Statistics Canada figures showed. The results signalled an improvement in the sectors of the economy that lead economic growth, such as the stock markets and housing.
"The leading economic index is coinciding with broad expectations for the Canadian economy to have turned the corner in the second half of 2009 and begun to head down the long road to recovery," Mr. Hall said.
