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(Chip Somodevilla/2007 Getty Images)
(Chip Somodevilla/2007 Getty Images)

How sticky is inflation? Add to ...

As inflation heats up, a key question is how much of the recent price increases stem from temporary factors, such as the Olympics, and how much represents longer-lasting shifts in the prices we pay for stuff.

February's consumer price index released last week showed the core index, which strips out volatile items like fruit and gasoline, accelerated 2.1 per cent from a year ago from a 2-per-cent increase in January. This measure is closely watched by the Bank of Canada, which sets monetary policy with an aim of keeping inflation at the 2-per-cent mark.

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The puzzle is the degree to which temporary factors are influencing consumer prices - and whether last month's increase was a one-month blip, or a harbinger of things to come.

"Inflation stickiness is something the BoC will be mindful of when deciding how quickly to unwind the stimulus," Bank of Montreal said.

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Some of last month's inflationary pressure came from transitory effects, such as higher accommodation prices amid last month's Winter Olympics - something the central bank is sure to bear in mind.

But broad price increases for everything from tuition to sugar are trickling into the economy. And that may continue as the economy recovers - and governments hike user fees to control deficits.

"The story of bumps in user-fee components such as auto insurance, tuition increases, transits fares, ATM fees, etc., will continue to have an impact as governments close deficits and financial institutions pay for writedowns and impending regulation requirements," said Sheryl King, head of Canadian economics and strategy at B of A Merrill Lynch in a report.

In March, fares among Ottawa buses and Toronto-area GO transit will go up. "And, the list of fee rises goes on."

Some of the price pressures may also stem from rising commodity prices. Tim Hortons, for example, boosted prices in much of Canada late last year, citing higher commodity prices.

Wages too, have been surprisingly sturdy, Bank of Canada Governor Mark Carney said in a speech last month. The "stickiness" of core inflation is "likely related to the resilience in wage growth," he said.

And wage growth has since picked up. Average hourly wages rose to 2.4 per cent in February from a year ago, accelerating from the previous month's 1.8-per-cent year-over-year gain.

Books and pet food are another hot area, and one that may be affected by currency movements, noted BMO. "These increases may simply be a lagged response to the currency's earlier weakness," it said.

Mortgage interest costs have been an important dampener of inflation over the past year. But those costs, too, are expected to grow as banks hike lending rates.

Yet not everything is getting pricier. The strong Canadian dollar remains a key cooling factor for inflation, and another element the central bank will consider. The currency has risen 20 per cent in the past year against its U.S. counterpart, and is now trading close to parity, driving down the cost of imports. In many cases, price decreases lag currency movements, but the persistent strength of the dollar suggests prices for some items like books and greeting cards should come down.

Here is a list of which prices are up the most in the past year, and which have fallen:



UP

Cereal products (excluding infant food): +5.1 per cent

Preserved fruit and fruit preparations: +5.6 per cent

Canned vegetables and other vegetable preparations: +12.6 per cent

Sugar and confectionery: +8.6 per cent

Telephone services: +5 per cent

Pet food: +8.5 per cent

Car insurance premiums: + 7.9 per cent

Rail, highway bus and other intercity transportation: + 9.3 per cent

Health care services: + 4.5 per cent

Tuition fees: + 4.1 per cent



DOWN

Ham and bacon: -2.1 per cent

Pasta: -5 per cent

Potatoes: -21.7 per cent

Mortgage interest cost: -5.8 per cent

Natural gas: -22.8 per cent

Furniture: -4.25

Women's clothing: -8.7 per cent

Air transportation: -9.5 per cent

Home entertainment equipment, parts and services: -8.0 per cent

Car rentals: -4.5 per cent



Investor Education: Productivity as explained by Gary Rabbior



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