18 May 2007

Running faster to stand still

Housing, fresh vegetables spur inflation 'problem'

Inflation is bubbling higher, and it's not just because of Alberta's superheated economy. Rising prices for fresh fruit and vegetables, dairy products, day care, municipal water, car repairs and shelter costs worked together to result in an inflation rate of 2.2% in April, Statistics Canada said yesterday. The core inflation rate, which excludes energy and other volatile prices, was 2.5%, marking 10 months in a row that it has been hovering at or above the central bank's 2% target. It is at its highest point in almost four years, and is now higher than the comparable US inflation rate. The only reason the total inflation rate is not much higher is because of the federal cut to the goods and services tax a year ago. “It had long been the case that Canada's inflation was more benign and more controlled than the United States,” said economist Warren Lovely at CIBC World Markets. “Increasingly, it's Canada that looks to have more of an inflation problem.” Until last June, core inflation had been running consistently below the 2% target, with prices kept in check by the climbing dollar, intense global competition and cheap import prices. That dynamic has clearly changed.

Alberta has been a source of strong inflationary pressure for years now, and remains so. Rising housing prices are also still fuelling inflation. But now, other goods and services - especially food products - have joined the inflationary pack. Over all, consumers paid 3.8% more for food in April than a year earlier, and a huge 12.9% more for fresh vegetables, Statscan said. And the dollar is not acting as a damper any more. While the currency is trading high these days, the loonie is no longer appreciating by 7% a year, as it has over the past few years. So when it comes to year-over-year inflation, cheaper imports are no longer part of the equation. Grocery retailers are on the front lines of the rising prices, and they blame a long, slow trickle-down effect from high energy costs. Transportation costs and packaging prices have soared, and despite cutthroat competition among grocers, there's only so long that the higher costs can be absorbed by retailers, Michael Pugliese, ceo of Michael-Angelo's Marketplace said. Economists also trace the rise in food costs to the sudden frenzy for ethanol and biofuels, which has driven up prices for grains, and anything fed grain.

There has also been a steady pressure on prices from the services sector, which has been the source of much of the strength in the Canadian job market and the broader economy, said Ted Carmichael, chief economist at JP Morgan Securities Canada. Carmichael expects inflationary pressure to continue its rise, and foresees the Bank of Canada raising rates in response, by September at the latest. But others see inflationary pressure abating, mainly because the climb in housing prices has peaked. While momentum in the housing sector does not completely explain the most recent surge in the pace of inflation, housing prices, especially in Alberta, have been responsible for much of the inflationary pressure until recently. House prices will likely continue to rise, but not as sharply as in the past, says Bank of Nova Scotia economist Adrienne Warren. She sees the Bank of Canada standing pat for the time being, and inflation settling back to the 2% range in the last half of the year.
(Globe and Mail 070518)

No comments: