Highlights
The 12-month percentage change in the All-Items Consumer Price Index (CPI) was down, from 2.8% between May 2005 and May 2006 to 2.5% between June 2005 and June 2006.
Gasoline and natural gas prices were the main contributors having influenced the slowdown of the 12-month change in the CPI. The 12-month increase in gasoline prices slowed from 18.6% in May to 15.4% in June as natural gas prices went from 15.6% in May to 6.5% in June. This slowdown impacted the 12-month change in the All-items index, which fell from 2.8% in May to 2.5% in June.
The 12-month change in the All-items index excluding eight of the most volatile components identified by the Bank of Canada for the purposes of monetary policy was up 1.7% between June 2005 and June 2006, following a 2.0% increase between May 2005 and May 2006. The June increase was more in line with the changes posted since August 2005, which ranged from 1.6% to 1.7%.
Excluding energy prices, the 12-month change in the CPI dropped from 1.8% in May to 1.5% in June.
Prices for the purchase and leasing of automotive vehicles and for traveller accommodation were the main factors slowing down the change in these two indexes.
On a monthly basis, the CPI was down 0.2% in June, in contrast with the three successive rises of 0.5% recorded in previous months. After climbing 0.5% in May, the All-items index excluding energy dropped in June by 0.2%, the strongest monthly decrease since January 2005.
The same trend was shown by the All-items index excluding eight of the most volatile components identified by the Bank of Canada. That index slipped 0.2% in June following the 0.5% jump observed the previous month. This was the largest month-over-month drop in the index since August 2004.
Twelve-month percentage change in the CPI: +2.5%
Twelve-month percentage change in the CPI excluding energy: +1.5%
In June 2006, the CPI climbed 2.5% over June 2005, less than the 2.8% increase posted the previous month. Higher gasoline prices accounted for most of this increase, followed by the rise in homeowners’ replacement cost and electricity prices. These increases were offset slightly by lower prices for computer equipment and supplies, video equipment, and women’s clothing.
Gasoline prices were up 15.4% between June 2005 and June 2006, an increase that was lower than the 18.6% leap posted between May 2005 and May 2006. All provinces recorded increases, with the highest in Saskatchewan (+19.7%) and the lowest in Quebec (+12.1%).
Homeowners’ replacement cost, which represents the worn-out structural portion of housing and is estimated using new housing prices (excluding land), rose by 7.4% from June 2005 to June 2006. Most of the increase originated in Alberta, where prices soared 35.1% over the past year. The flurry of economic activity spurred by the province’s oil and gas operations had an impact on housing starts, exerting upward pressure on material and labour costs and contributing to the rise in the CPI. Twelve-month changes of more than 10% in homeowners’ replacement cost have been posted in Alberta since December 2005, pushing that province’s All-items index to levels higher than the Canadian average. Manitoba was a distant second, with a 12-month increase of 7.9% in June.
Percentage Change from the Same Month of the Previous Year, Canada
Electricity prices climbed 6.2% between June 2005 and June 2006. Rising prices over the past few months in Ontario and Quebec continued to have an impact on the 12-month trend in the electricity index.
Mitigating the upward trend in the 12-month All-items index, the computer equipment and supplies index dropped 15.7%. Prices for video equipment, which were down 10.8%, also had a moderating effect on the rise in the CPI. Technological progress makes it possible to produce computers, audio and video players, and televisions at lower cost, thus bringing down prices for consumers.
Prices for women’s clothing were down 3.1% between June 2005 and June 2006. All provinces posted lower prices. The stronger loonie enables Canadians to pay less for clothing often made in other countries that are sold in specialty boutiques or department stores.
Impact on CPI of decrease in Goods and Services Tax
The Government of Canada recently announced that the rate in effect for the Goods and Services Tax (GST) will be reduced from 7% to 6% as of July 1, 2006. Since the price changes measured by the CPI take into account the value of the consumption taxes paid by Canadians, this 1% decrease will have an impact on the change in the CPI. A rough estimation of the impact of this decrease on the level of the CPI suggests a decrease in the order of 0.6%. This estimation is based on the assumption that the entire amount of the decrease will be transferred to consumers and that the industrial structure that underlies the way that prices are determined will remain the same. Since some products, such as many foods sold in supermarkets, are exempt from GST, the resulting decrease will necessarily be less than 1%.
Semi-annual outlook: Higher energy prices have pushed up the CPI since the beginning of the year
Although Canadian consumers will enjoy a decrease in the Goods and Services Tax as of July 1, 2006 and the evolution of the exchange rate is favourable, they have had to face substantial increases in energy costs since the beginning of the year. During the first semester of 2006, the average level of the CPI rose 2.5% in comparison with the first six months of last year. The energy sector, which includes gasoline, fuel oil, natural gas and electricity, jumped 11.3%. All provinces posted increases ranging from 13.4% in Ontario to 8.1% in British Columbia.
Gasoline and fuel oil prices shot up more than 10% throughout Canada’s provinces during the first six months of 2006, largely because of the dizzying rise in the price of a barrel of oil on world markets. Trends in natural gas and electricity prices varied widely from province to province. This situation can primarily be explained by the different policies adopted by provincial governments to set price levels for natural gas and electricity. Ontario (+24.2%) and Manitoba (+17.1%) recorded the highest increases in natural gas prices over the first six months, while Alberta (+3.2%) and Saskatchewan (+4.8%) posted the lowest increases.
Alberta nonetheless experienced the most substantial rise in electricity prices, which were up an average of 14.2% during the first six months of 2006. Deregulation in Alberta’s electricity sector has led to greater price fluctuations over the last few years. With a 0.6% drop in electricity rates, Prince Edward Island is the only province that posted a decrease in the first six months of 2006. Since September 2005, consumers in that province have enjoyed lower prices for ten straight months owing to a mechanism in place whereby rates are adjusted each month to reflect the costs incurred to produce electricity.
Monthly percentage change in the CPI: -0.2%
Monthly percentage change in the CPI excluding energy: -0.2%
Between May and June 2006, the All-items index fell 0.2%, halting three consecutive monthly gains. The downward pressure on the CPI came largely from the purchase and leasing of automotive vehicles, natural gas, and women’s and men’s clothing. Offsetting factors included increased prices for fresh fruit and homeowner’s replacement cost.
Prices for the purchase and leasing of automotive vehicles decreased by 1.1% in June. Financial incentives offered by some automakers brought this index down.
The 7.0% drop in natural gas prices also pushed down the All-items index. In Alberta, a 33.0% plunge in natural gas prices accounted for much of this drop. Alberta consumers benefited from lower prices for gas and from a credit granted by a gas distributor. Quebec also posted a slight decrease of 2.0%.
A large number of clearance sales served to bring down the indexes for women’s clothing (-2.8%) and men’s clothing (-2.5%) from May to June 2006.
Offsetting the decrease in the All-items index to some extent, fresh fruit prices increased 4.0% between May and June 2006. All categories of fresh fruit, such as apples, oranges, bananas and other fresh fruit, posted increases.
The homeowners’ replacement cost index was up 0.7% between May and June, owing largely to a 4.5% increase posted in Alberta.
The seasonally adjusted CPI decreased by 0.1% between May and June
After being adjusted for seasonal variations, the CPI decreased by 0.1% between May and June 2006. The downward pressure came from the transportation (-0.4%), the shelter (-0.2%), the clothing and footwear (-0.7%), the recreation, education and reading (-0.2%), and the household operations and furnishings (-0.2%) components.
The seasonally adjusted index was nonetheless pushed up mainly by the indexes for food (+0.2%) and health and personal care (+0.1%). The alcoholic beverages and tobacco products index remained unchanged.
The seasonally adjusted CPI without the eight volatile components identified by the Bank of Canada stayed unchanged from May to June 2006.
Special aggregates
The All-items index excluding the eight volatile components identified by the Bank of Canada
One of the elements used by the Bank of Canada to measure core inflation for the purposes of monetary policy is the CPI excluding eight of the most volatile components identified by the Bank. The 12-month increase in this index was 1.7% in June 2006. The major factors that contributed to this rise were homeowners’ replacement cost (+7.4%), electricity prices (+6.2%), restaurant meals (+3.1%) and the purchase and leasing of automotive vehicles (+1.6%). The increase was mitigated by lower prices for computer equipment and supplies (-15.7%), women’s clothing (-3.1%), video equipment (-10.8%), and men’s clothing (-2.7%).
Between May and June 2006, the All-items index excluding eight of the most volatile components identified by the Bank of Canada decreased by 0.2%. This decrease came after a 0.5% increase noted the previous month. The main factors behind the drop in this index were lower prices for the purchase and leasing of automotive vehicles (-1.1%), women’s clothing (-2.8%), and men’s clothing (-2.5%). The factors that partially compensated for this decrease were higher homeowners’ replacement cost (+0.7%), and prices for restaurant meals (+0.4%) and for paper supplies (+2.0%).
Energy
In the wake of a 14.1% rise from May 2005 to May 2006, the energy index posted a relatively smaller increase of 11.5% between June 2005 and June 2006.
Although all components contributed to the increase in the energy index, gasoline (+15.4%) was the primary factor, followed by electricity (+6.2%), fuel oil (+13.5%), natural gas (+6.5%) and fuel, parts and supplies for recreational vehicles (+10.3%).
On a monthly basis, the energy index decreased by 1.0% between May and June 2006, primarily owing to the decrease in prices for natural gas (-7.0%), gasoline (-0.4%), and parts and supplies for recreational vehicles (-0.3%). Prices for electricity and fuel oil remained unchanged since the previous month.
Goods and services
The goods index was up 2.2% between June 2005 and June 2006. This increase could be attributed to the rise in prices for non-durable goods (+4.5%), with semi-durable goods (-1.8%) and durable goods (-0.7%) posting decreases.
In June, the upward trend in the non-durable goods index could be explained by higher prices for gasoline (+15.4%), electricity (+6.2%), and fuel oil (+13.5%). These price increases were partly offset by lower prices for pork (-8.1%), fresh fruit (-1.9%), and toiletries and cosmetics (-1.1%).
The 1.8% decrease in the semi-durable goods index could largely be accounted for by lower prices for women’s clothing (-3.1%), men’s clothing (-2.7%), and toys, games and hobby supplies (-4.4%), but was partly mitigated by higher prices for school textbooks (+1.7%), as was the case last September.
The durable goods index was down 0.7%, primarily as a result of lower prices for computer equipment and supplies (-15.7%) and video equipment (-10.8%). Higher purchase prices for automotive vehicles (+1.6%), parts and supplies for automotive vehicles (+2.6%), and wooden furniture (+1.3%) counterbalanced the downward trend.
In June 2006 the services index was up 2.6% over June of last year. Increases in homeowners’ replacement cost (+7.4%), prices for restaurant meals (+3.1%), and property tax (+3.2%) accounted for most of this increase. Most of the downward pressure was created by lower costs for traveller accomodation (-3.7%).
On a monthly basis, the goods index was down 0.6% between May and June, because of the downward trend in the indexes for semi-durable goods (-1.8%), durable goods (-0.8%) and non-durable goods (-0.1%).
The decrease in prices for women’s clothing (-2.8%) and men’s clothing (-2.5%) accounts for much of the drop in the semi-durable goods index, while the decrease in natural gas prices (-7.0%) was the main contributor to the downward trend in the non-durable goods index. The drop in purchase prices for automotive vehicles (-1.2%) partly explains the downward trend in the durable goods index.
Between May and June, the cost of services was up 0.1%. The increase comes mainly from the upward trend in homeowners’ replacement cost (+0.7%) and prices for restaurant meals (+0.4%).
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