Canadian Press - Monday July 24, 2006
By Michael Hammond
OTTAWA (CP) - A "shocking" broad-based decline in consumer prices put Canada's annual inflation rate at 2.5 per cent in June, down from May's 2.8 per cent and reducing the need for higher interest rates.
Economists say the lower-than-expected inflation rate, announced Friday by Statistics Canada, is not only good news for homeowners with mortgages, but the number marks an important victory for Bank of Canada governor David Dodge.
"It's an unbelievable number," said CIBC senior economist Benjamin Tal. "This makes Dodge look really good."
June's inflation rate confirms the Bank of Canada's earlier assurances that the national economy is cooling to more reasonable levels. It also suggests interest rates will not budge for now.
In reaction, the Canadian dollar fell 0.35 of a cent to 87.92 cents US in midday trade Friday.
Some economists criticized Dodge earlier this month when he decided to leave the bank's key overnight lending rate at 4.25 per cent, instead of raising it.
The statistics agency said the core inflation rate, which excludes volatile components such as energy and food prices, came in at 1.7 per cent. Tal said the market expected core inflation to reach as high as 2.1 per cent.
"This is just shocking," he said.
But BMO Nesbitt Burns economist Douglas Porter said part of the reason inflation eased was that retailers and automakers had to adjust their prices before the federal GST cut on July 1. He also said the loonie's 28-year high continued to cut into Canada's exports.
"Just like May's reports exaggerated inflationary pressure, this report may have exaggerated the numbers on the down side," he said.
May's unprecedented job gains, combined with higher-than-expected wage increases in June, had economists worried about inflation pressure. David Tulk of TD Economics said June's inflation numbers prove that Dodge has a good handle on the economy.
"This report takes the monkey off his back," Tulk said. "Many had thought the bank had gone to the sidelines too early."
Tal said he was most surprised that the price increases in almost every sector eased in June, led by the price of gasoline.
After registering nearly 20 per cent increases in previous months, gasoline prices posted a 15.4 per cent increase in June. But Saskatchewan motorists still paid nearly 20 per cent more to fuel their vehicles.
Since consumer prices are now below the Bank of Canada's target two per cent core inflation target, Tal said it's not too early for consumers to start thinking about interest rate cuts before the end of the year.
But Porter said interest rate cuts likely won't happen before 2007, since the U.S. Federal Reserve is still under pressure to hike its lending rate.
Canadians paid less for computer equipment, home electronics and clothing in June. This summer's car buying incentives also contributed to lower prices in the automotive sector.
Alberta's torrid economic activity continued to drive the upward pressure on prices. The homebuilding and home renovation industries in that province contributed to an overall jump in the cost of building materials.
Home replacement costs, which include those items used for structural repairs, rose 7.4 per cent.
Ontario and Quebec consumers continued to pay more for energy, as the price of power jumped by 6.2 per cent in the month. This gain was partly offset by a seven per cent drop in the price of natural gas.