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Thursday, February 18, 2010

Gas prices drive inflation to 1.9 per cent

Michael Babad

Globe and Mail Update
Published on Thursday, Feb. 18, 2010 7:08AM EST

Last updated on Thursday, Feb. 18, 2010 10:20AM EST

Cars – and everything about them – drove up consumer prices in January at the fastest pace since late 2008.

Overall annual inflation, the so-called headline rate, rose in January to 1.9 per cent from 1.3 per cent in December, Statistics Canada said Tuesday. That marks the sharpest increase since November, 2008, and is just shy of the Bank of Canada's 2-per-cent target.

On a monthly basis, prices rose 0.4 per cent from December, the federal statistics gathering agency said.

While six of the eight components in the consumer price index rose, vehicles, and what makes them run, were by far the biggest culprit. Gasoline prices rose 23.9 per cent from a year earlier, while insurance premiums jumped 7.7 per cent. The purchase price of the vehicles themselves rose 3.1 per cent. That's notable in that it marks the first time since June, 2007, that vehicle prices have increased on a year-over-year basis.

A closer look at gas prices shows a dramatic regional effect. Overall inflation rates were highest in the eastern provinces, according to the Statistics Canada data, driven by sharp increases in fuel costs that ranged from 26.5 per cent in Newfoundland and Labrador to 35.6 per cent in New Brunswick. Inflation rates ranged from 3.1 per cent in Nova Scotia to 4 per cent in Prince Edward Island.

The Bank of Canada's core inflation reading, meanwhile, which excludes volatile items and guides the central bank's monetary policy, jumped to 2 per cent from 1.5 per cent in December, though economists don't believe this will affect Governor Mark Carney's pledge to hold interest rates at historic lows until at least midyear.

“While Canadian headline inflation has accelerated in recent months and core prices popped in January, look for inflation to slow over the next two months,” said BMO Nesbitt Burns economist Benjamin Reitzes. “Indeed, the Bank of Canada's latest forecast for 1.6 per cent year over year inflation in [the first quarter] is still attainable despite the hotter figure. The inflation story remains the same, with a strong Canadian dollar and significant spare capacity helping keep both headline and core inflation in check, which should allow the bank to hold to its commitment to keep rates steady until the end of June.”

When energy is factored out, consumer prices rose 1.3 per cent year over year, compared to 0.8 per cent in December, Statistics Canada said.

Food prices were also up in January, by 1.4 per cent, though that was the slowest pace since April, 2008 and was largely due to higher costs at restaurants and for non-alcoholic drinks. Prices also rose for health and personal care, recreation and education, while costs for shelter fell.

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