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Weaker gasoline prices in each province showed the increase of the Consumer Price Index to its lowest level in eight months in August. Consumers paid 1.7% more for the goods and services of the CPI basket in August 2007 than they did in August 2006, substantially lower than the increase of 2.2% posted in the previous four months.

The 12-month increase was driven largely by mortgage interest cost and homeowners' replacement cost. The increase in these components exerted upward pressure on the cost of owned accommodation. This component has been the major contributor to the increase in prices since last April.

The slower growth in consumer prices was largely the result of drop in gasoline prices observed in every province. Computer equipment and supplies, video equipment and fresh vegetables also exerted significant downward pressure on consumer prices.

The all-items index without energy increased 2.3% in August 2007 compared with the same month of the previous year–down from the 2.5% growth reported in July. Purchase and leasing of motor vehicles and women's clothing accounted for the majority of this slowdown.

The Bank of Canada’s core index, used to monitor the target for inflation control, increased 2.2% from August last year. This is a slight slow down from the 2.3% increase posted in July. The rise in homeowners' replacement cost drove most of the increase in August.

If the data are adjusted to remove seasonal effects, prices fell 0.1% between July and August 2007, which is the same growth posted the previous month. Without seasonal adjustment, prices declined 0.3% between July and August 2007, which is the fastest decline in nearly a year. The biggest factors were lower gasoline prices, and to a lesser extent, lower prices for vehicle purchases and leases and fresh vegetables.

The all-items index without energy remained unchanged between July and August, whereas the core index rose 0.2% over the same period. Both indexes had increased 0.1% between June and July.

Twelve-month increase: Costs for owned accommodation remain strong as gasoline prices ease

The Consumer Price Index (CPI) rose 1.7% during the 12-month period prior to August 2007–a sharp deceleration from the 2.2% growth posted in July 2006. This is the slowest rate of growth posted since January 2007.

The main source of upward pressure on consumer prices in August was higher costs for owned accommodation and, to a lesser extent, food.

Canadian homeowners again saw their costs increase in August. Mortgage interest cost contributed significantly, rising 6.1% between August 2006 and August 2007. This increase was the most pronounced since June 1991 and followed a 12-month increase of 6.0% in July. The annual growth posted in August was largely driven by higher prices for new housing, which had been slowing down in recent months. Mortgage renewals at higher interest rates, however, contributed more significantly to the growth of mortgage interest cost in the past two months.

Homeowners' replacement cost increased 6.0% in August–slightly down from the 6.2% observed in July. This rate of growth is well below the average annual change recorded since early 2007 (+6.6%). This cost represents the worn-out structural portion of housing and is estimated using new housing prices (excluding land).

Higher property taxes (+3.0%) and rents (+1.7%) also had a significant influence on housing costs.

Canadians spent 2.0% more for food purchased in grocery stores in August 2007 than in August 2006. This annual rise can largely be explained by higher prices for meat (+3.5%), dairy products (+3.1%) and bakery products (+3.7%). Prices for restaurant meals rose 3.5% during this period.

The slowdown in the growth of consumer prices was largely the result of falling gasoline prices. Following a 2.8% drop in July, average prices at the pump were 7.7% lower in August 2007 compared to the same month last year. This was the most pronounced decrease in this component since last January. Lower gasoline prices were seen in every province.

In response to the news of a downturn in the United States economy, the price of crude oil fell in early August. With the strength of the Canadian dollar relative to the U.S. greenback, local refineries were able to pay less for crude oil in August 2007 than during the same period in 2006.

In late August, the United States Department of Energy announced that gasoline stocks had reached the equivalent of 20 days of average demand, representing an historically low levels.

Lower prices for computer equipment and supplies (-17.4%) also exerted downward pressure on the change in consumer prices in August. However, this decrease was less than the average year-over-year decrease recorded since the beginning of 2007 (-18.4%).

Prices for video equipment were down by 8.6%, the same rate as the previous month.

Consumers were also able to take advantage of price decreases of 4.9% for fresh vegetables and of 2.3% for fresh fruits in August. Year-over-year price decreases for potatoes and lettuce had a significant impact on vegetable prices.

The twelve-month increase in the CPI slows in all provinces

In August, the annual increase in the CPI slowed in all provinces, primarily due to falling gasoline prices.

The cost of owned accommodation was the largest contributor to the increase in consumer prices in all provinces. The chart below shows that the 12-month increase in this component varied substantially across provinces. In all provinces except New Brunswick and Saskatchewan, the rise in the cost of owned accommodation was sustained mainly by the growth in mortgage interest cost, a component of owned accommodation.

The only provinces in which consumer prices rose faster than the national average were Alberta (+4.7%) and Saskatchewan (+2.4%). This gap has persisted since February 2007 for Saskatchewan and since August 2005 for Alberta.

The drop in gasoline prices ranged from 6.4% in Newfoundland and Labrador to 13.2% in New Brunswick. Plunging gasoline prices in New Brunswick led to a pronounced slow down in the CPI in that province from 2.2% in July to 1.3% in August.

Increases in consumer prices of less than 1% were noted in Newfoundland and Labrador (+0.2%) and Quebec (+0.8%). The slowing of price increases in these two provinces was strongly associated with lower gasoline prices.

From July to August 2007: gasoline moderated the rise in consumer prices

Consumer prices fell by 0.3% between July and August 2007–the most substantial monthly decline observed in this index since September 2006. This decrease is largely the result of lower gasoline prices and, to a lesser extent, a decline in prices for vehicle purchases and leases and fresh vegetables. These decreases were partly offset by the rise in mortgage interest cost, electricity, men’s clothing and homeowners' replacement cost.

The monthly decline posted in August stems mainly from the 4.9% drop in gasoline prices. This was a strong downturn compared with the modest 0.1% decrease recorded between June and July 2007. This component exerted most of the downward pressure on the change in the CPI for every province. A monthly decrease of this magnitude has not been recorded since September 2006.

Canadian drivers also enjoyed a 1.8% reduction in the cost of vehicle purchases and leases. Discounts on 2007 models continued to account for the downward movement of prices for new vehicle prices.

Prices for food purchased in stores dropped by 0.7% between July and August 2007 as a result of lower prices for fresh vegetables, with local harvests swelling supply in this market. Lower tomato prices had a significant dampening effect on this index.

These decreases were partly offset by the growth in other components, such as mortgage interest cost–which rose by 0.7% in August and is down slightly from the 0.8% growth reported in July. The moderate slowdown in mortgage interest cost can largely be attributed to the softening in new housing prices.

Replacement cost increased by 0.5% between July and August 2007, a rate that remained unchanged from the previous period.

Twelve-month change: Replacement cost by homeowner pushes core index ahead

The Bank of Canada's core index increased by 2.2% during the 12 months preceding August 2007, a slight deceleration from the 2.3% posted in July. The rise in this index was primarily driven by the rise in homeowners' replacement cost.

On a monthly basis, the core index rose by 0.1%, the same rate of growth recorded in the previous month. If the seasonal effects are removed, the increase of the core index would remain 0.1% between July and August 2007.

The core index is obtained by removing the effect of the changes in indirect taxes from the all-items CPI from which the eight most volatile components identified by the Bank of Canada have been excluded. These volatile components are fruit, fruit preparations and nuts; vegetables and vegetable preparations; mortgage interest cost; natural gas; heating oil and other fuels; gasoline; inter-city transportation; and tobacco products and smokers’ supplies.

Energy index hits its lowest level since January 2007

The price index for energy products was down by 3.7% in August 2007, compared with August 2006, adding to the 1.7% reduction posted the previous month. This was the largest drop in this index since last January, and it was largely driven by the 12-month decrease in gasoline prices (-7.7%). During this period, prices for heating oil and other fuels (-1.6%) and fuel, parts and supplies for recreational vehicles (-0.5%) also experienced significant reductions. The 0.6% rise in natural gas prices during this period had only a minor effect on the change in the energy index. With 2.0% growth, electricity exerted the strongest upward pressure on the energy index during this period.

The energy index fell by 2.4% between July and August 2007–the strongest monthly decrease posted since October 2006. This drop is mainly the result of the 4.9% reduction in gasoline prices and, to a lesser extent, the 2.5% decrease in prices for fuel, parts and supplies for recreational vehicles. These decreases, however, were partially offset by the increase in prices for electricity (+0.5%) and for natural gas (+0.8%).

Lower prices for high-tech products drag down the goods price index on a year-over-year basis

Prices for services rose by 3.7% in August 2007 from August 2006, the same as the annual rate of growth in July. This increase was primarily driven by the rise in mortgage interest cost (+6.1%) and homeowners' replacement cost (+6.0%) during the 12 months leading up to August 2007.

After declining by 0.4% on a monthly basis in July, prices for services rose by 0.2% between July and August 2007. The deceleration in mortgage interest cost was the primary cause for the weak growth in this index.

Prices for goods were down by 0.2% in August 2007 compared to the same month last year. This decrease is the most significant noted since January 2007 and is far below the 0.5% growth posted in July. The decrease observed in August is primarily attributable to the 0.5% price drop in durable goods. Prices for semi-durable goods (-0.1%) and non-durable goods (-0.1%) also exerted a downward effect on this index, albeit to a lesser degree.

The downward pressure on the durable goods price index during this period came mainly from the decrease in prices for computer equipment and supplies (-17.4%) and video equipment (-8.6%). On a year-over-year basis, prices for durable goods have been decreasing since May 2006. In August, this index posted a 0.5% drop for the third consecutive month.

The decrease in prices for semi-durable goods (-0.1%) represented a shift compared to the 0.7% growth recorded in this index during the previous period. Between August 2006 and August 2007, this index was driven downwards by women's clothing prices, which fell by 1.2%.

The 7.7% drop in gasoline prices in August 2007 compared with August 2006 exerted strong downward pressure on the non-durable goods index. The decrease in fresh vegetable prices also had a significant influence. Without energy components and food purchased in stores, the non-durable goods index grew by 1.7% during this period.

On a monthly basis, the goods index fell by 0.6%. The combined effects of the decrease in prices for non-durable goods (-1.1%) and durable goods (-0.2%) were only partially offset by the increase in semi-durable goods (+0.4%). Between July and August 2007, the decline in prices for non-durable goods was largely accounted for by lower prices for gasoline (-4.9%) and food purchased in stores (-0.7%). The drop in prices for durable goods was largely driven by lower prices for vehicle purchases and leases (-1.8%).

Seasonally adjusted CPI decrease by 0.1% between July and August

The drop in three of the eight main components has been partially offset by the rise in the five other components. Therefore, the all-items index decreased 0.1% between July and August. The components that exerted downward pressure were transportation (-1.9%), clothing and footwear (-0.5%), and food (-0.1%). The progression for housing (+0.5 %), health and personal care (+0.4%), and recreation, education and tobacco products (+0.2%) mitigated the downward pressure from the other components.

The seasonally adjusted core index as defined by the Bank of Canada increased by 0.1% between July and August 2007.