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Canada's Inflation Rate Steady at 2.2% in March, Higher Interest Rates Likely

Posted on: Thursday, 20 April 2006, 15:00 CDT

By SANDRA CORDON

OTTAWA (CP) - Higher prices for gasoline and housing kept Canada's annual inflation rate at 2.2 per cent on March, the same as February, but analysts say that figure is heading higher this month as prices at the gasoline pump continue to rise.

And the increase in the cost of living makes it almost certain the Bank of Canada will nudge its trend-setting short-term interest rate higher next Tuesday to keep inflation in check, the analysts said Thursday.

After five consecutive rate increases of one-quarter of a percentage point each, the central bank is widely expected to raise its key overnight rate to four per cent from the current 3.75 per cent.

Central bankers closely track the "core" rate of inflation, which excludes volatile food and energy items and averaged 1.7 per cent in both March and February.

That's well within the central bank's target band of one to three per cent and policy-makers aim to keep it that way, through higher borrowing costs.

But they'll likely shrug off rising gasoline prices that are already pushing overall inflation even higher for April and could bump the annual rate to almost three per cent this month from the 2.2 per cent seen in March, said Marc Levesque, chief fixed income strategist for TD Securities (TSX:TD).

He figures that gasoline prices at the pump averaged about 95 cents a litre in March and are on pace to average as much as $1.06 per litre this month.

That could translate into as much as a half a percentage point rise in the April consumer price index when it's released a month from now.

"It'll be a pretty big increase," Levesque said. "It means a lot for consumers and their pocketbooks, obviously - it's going to squeeze their spending power."

In March alone, gasoline prices were already 7.4 per cent than they were one year ago, Statistics Canada reported Thursday in its monthly consumer price index report.

The cost of gas at the pumps has been soaring this week on the back of climbing prices for crude oil, which hit a fresh high above $72 US a barrel early Thursday before softening slightly.

Fears that supplies from Nigeria and the Middle East may be choked, as well as rising demand, are pushing up the cost of crude oil.

Despite that increase, the Bank of Canada will remain focused on core inflation, which isn't influenced by monthly fluctuations in gasoline prices, analysts said.

Other forces are working to cool economic growth and inflation, so the central bank might raise rates once more after a widely expected April 25 hike but it won't go much beyond that, said Warren Lovely of CIBC World Markets (TSX:CM).

"Monetary tightening, a strong currency and tamer U.S. demand should spell slower economic growth ahead, calming inflation fears," Lovely said in a note to clients.

Despite predictions of higher interest rates, the loonie was trading as low as 87.66 cents US on Thursday, down 0.38 of a cent from Wednesday's close.

While higher gasoline prices don't affect the core inflation rate, rising housing prices do have an impact. And housing costs jumped by six per cent last month, compared with one year earlier.

"Housing ... is an undeniable core inflation hot spot," said Lovely.

However, that won't likely last much longer, he added, as higher interest rates will begin to slow the rate of price increases.

Offsetting higher prices for housing and gas in March were lower costs for computer gear and clothing, Statistics Canada said.

Compared with February, the price of fresh vegetables dropped by 6.5 per cent in March while fresh fruit was 3.1 per cent less expensive, mainly thanks to cheap oranges.

Source: Canadian Press

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