Inflation rate rises on new HST

Jeremy Torobin

The Harmonized Sales Tax last month pushed Canada’s annual inflation rate to the highest since April, but a drop in a measure of price gains that strips out the levy’s impact reinforced doubts about how much more the central bank will hike interest rates.
Even with the HST coming into force in Ontario and British Columbia, plus a tax hike in Nova Scotia as well as higher energy costs, year-over-year inflation during the month stopped short of what many economists had expected, accelerating to 1.8 per cent instead of 1.9 per cent. While the reading from Statistics Canada Friday compares with a 1 per cent increase in June, it’s still less than the Bank of Canada’s 2-per-cent target.
The so-called core rate, which excludes tax changes and volatile items like energy, dipped unexpectedly to 1.6 per cent on a year-over-year basis from 1.7 per cent the month before – leaving it below Bank of Canada Governor Mark Carney’s forecast of 1.8-per-cent core inflation for the entire third quarter. On a monthly basis, the consumer price index rose 0.5 per cent – the highest since late last year – as the HST lifted prices across the economy while the core rate dropped 0.1 per cent.
All in, the numbers give Mr. Carney more wiggle room to pause his tightening campaign some time this fall to assess how much damage the sputtering rebound south of the border and sluggish growth in much of Europe may do to the Canadian recovery. Mr. Carney has said growth likely slowed to 3 per cent in the second quarter from 6.1 per cent in the first three months of the year, and though he raised borrowing costs in June and July he has stressed that further moves would be ``weighed carefully” against economic developments at home and abroad.
``Underlying inflation remains quite tranquil, neither threatening a dip into deflation terrain nor a push above the 2-per-cent target,” said Douglas Porter, deputy chief economist with BMO Nesbitt Burns in Toronto. ``The Bank of Canada has the option to pause on its rate-hiking campaign, if the growth backdrop stumbles further. This just adds one more arrow into the quiver of reasons the Bank may take a timeout.’’ The central bank has said it will ``look past” the initial effects of the HST, which it predicts will add 0.6 percentage point to annual inflation from the tax’s unveiling on July 1 through next June. Core inflation, meanwhile, will average 1.8 per cent over the next three quarters, according to Mr. Carney’s forecasts.
The inflation data caused the Canadian dollar to drop as investors scaled back bets that Mr. Carney will raise his benchmark interest rate from 0.75 per cent to 1 per cent at his next decision on Sept. 8. Based on the overnight-index swaps market, the chances of a September rate hike are deemed to be between 40 and 50 per cent.
Most economists argue that economic conditions in Canada are strong enough to justify a third consecutive rate increase, but that could be the last for a while.
``The mild inflation report should give the Bank of Canada some comfort in toning down its language about its tightening bias as it contemplates taking a long pause after a September rate hike,” said Krishen Rangasamy, an economist with CIBC World Markets. ``Canadian prices remain well under wraps despite the economic recovery.’’ Energy prices rose 7.9 per cent from a year earlier in July, Statscan said, including a nearly 10-per-cent gain in electricity costs. Gasoline prices rose 4.8 per cent and homeowners’ replacement costs rose 5.5 per cent. Cars and trucks were 1.7-per-cent more expensive than a year earlier, while insurance premiums rose 5.1 per cent.
Meanwhile, an index of mortgage-interest costs declined as did the cost of clothing and footwear.
Ontario had the biggest year-over-year increase as consumer prices rose 2.9 per cent, and B.C. saw a 2-per-cent gain, Statscan said.