‘No concern’ on inflation

Canadians paid more for food, clothes and tuition in October as the annual inflation rate ticked higher for the first time in five months, but economists say consumers shouldn’t worry that price pressures will force interest rates higher.

Canadians paid more for food, clothes and tuition in October as the annual inflation rate ticked higher for the first time in five months, but economists say consumers shouldn’t worry that price pressures will force interest rates higher.

“There’s no concern whatsoever about inflation,” said Patricia Croft, chief economist and vice-president of Phillips, Hager and North in an interview Wednesday.

“The Bank of Canada will stick to its script in keeping short-term interest rates at these exceptionally low levels until at least June of next year,” she suggested.

Statistics Canada said the annual inflation rate jumped a full point to 0.1 per cent in October.

The rate edged above zero reversing an unusual situation that had existed since May in Canada where overall prices were lower than a year earlier.

The data also showed Canadians were paying less for gas, automobiles and hotels.

For months, analysts have said Canada’s negative inflation situation was not worrisome because it was based solely on the spike in oil and gasoline prices in the summer of 2008, which helped reverse the inflation rate year over year as prices fell in recent months because of the recession.

Oil prices that hit US$147 a barrel in July of 2008 are now trading at under $80 a barrel on global commodity markets. Gasoline prices in Canada that hit more than C$1.40 a litre averaged just under $1.01 across the country on Wednesday, according to GasBuddy.com, a North American fuel monitoring website.

Rising inflation hurts the economy because if affects consumer behaviour by distorting buying trends, leads to demands for higher wages and raises the cost of manufacturing goods exported abroad. Central banks focus on fighting inflation and usually raise interest rates to dampen demand in the economy to keep price pressures under control.

When inflation gets out of hand — as it did in the late 1970s in the wake of a global oil price shock – that led to interest rates jumps that eventually hit more than 22 per cent in North America, leading to mortgage defaults, bankruptcies and widespread industrial restructuring before the economy started to stabilize.

In the Statistics Canada report, the agency noted the correction began in October, as the gap between this year’s gas prices and those in the previous year closed from 23 per cent in September to 13.1 per cent.

Statistics Canada noted that excluding energy prices, Canada’s annual inflation rate would have been 1.4 per cent.

“Overall, it doesn’t mean that inflation is back with a vengeance in Canada… you have to look at the long-term trend,” said CIBC World Markets economist Krishen Rangasamy.

“We think that oil prices are not going to be very strong next year, primarily because global growth will still be pretty weak.”

During October, transportation costs fell 3.1 per cent on the basis of lower gas prices and a 4.1-per-cent decrease in the cost of vehicles.

However, the agency said six out of the eight major components it uses to measure inflation were higher last month than a year before, including food, clothing, household operations and furnishings, health and personal care, recreation and alcohol and tobacco.

Food continues to be a main driver of higher inflation, although less so than a few months ago. Food prices were 2.3 per cent higher in October than 12 months earlier.

Croft suggested that a food prices could pull back in the coming weeks as the holiday season gets underway, and supermarkets ramp up their sales to lure in shoppers who are planning big meals.

On Tuesday, executives for Loblaw Companies Ltd. (TSX:L) said the supermarket giant is cutting prices to stay competitive during the holidays.

“We’re hearing now that there may be a bit of a price war as we head into the holiday season,” said Croft.

“In terms of food price inflation, I think we’re going to see some relief there.”

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