Statistics Canada
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The Consumer Price Index

December 2007

62-001-X


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Analysis

Consumer prices increased 2.4% between December 2006 and December 2007, a slight deceleration from the 12-month change of 2.5% in November. Again this month, higher gasoline prices and mortgage interest costs were the main factors driving the increase.

Gasoline prices rose by 14.9% between December 2006 and December 2007, less than the 12-month increase of 17.6% posted the previous month. The increase in the all-items index excluding gasoline was 1.7% over the past twelve months, unchanged from the previous month.

The Bank of Canada’s core index, which is used to monitor the inflation control target, rose by only 1.5%—the sixth consecutive month in which the index has decelerated. This increase is the lowest recorded since December 2005. In December 2007, the strongest upward pressure on the 12-month change in this index came from homeowners’ replacement cost (+4.4 %). The decline of prices for motor vehicles (-4.1%) partially offset the impact of this upward pressure.

Chart 1 Percentage change in the core CPI (Bank of Canada definition) from the corresponding month of the previous year, Canada, not seasonally adjusted
Source(s):  CANSIM table number 326-0020.

On the whole, seasonally adjusted consumer prices rose by 0.3% between November and December 2007, while the seasonally adjusted core index edged up 0.1% during this period.

Unadjusted for seasonality, consumer prices rose by 0.1% between November and December 2007 after climbing by 0.3% during the previous month. The slower rate of growth occurred at the same time as the monthly slowdown in gasoline prices. Month-over-month, gasoline prices slowed from a 4.0% increase in November to 1.7% in December.

The core index dropped 0.3% between November and December after remaining unchanged in the previous month. The decrease in clothing prices between November and December exerted strong downward pressure on this index.

12-month change: 14.9% increase in gasoline prices remains the main source of upward pressure for the fourth consecutive month

The 2.4% change in consumer prices was primarily driven by the 14.9% growth in gasoline prices between December 2006 and December 2007. This rise coincided with a significant increase in crude oil prices on international markets. The 12 month increase in gasoline prices reported in December was more moderate than the rise reported in November (+17.6%), a factor that had a dampening effect on the rise of the all-items index. Gasoline represents 4.9% of the current CPI basket. This component accounted for a substantial share of the growth in consumer prices since September, a reflection of the significant fluctuations in gasoline prices.

Chart 2 Evolution of the gasoline price index, Canada, not seasonally adjusted
Source(s):  CANSIM table number 326-0020.

If gasoline prices were excluded, the all-items index increased only 1.7% during the past 12 months, unchanged from the previous month.

Increasing prices for heating oil (+27.1%) also exerted significant upward pressure on consumer prices. A 12-month rise of such a magnitude had not been recorded since October 2005. Higher crude oil prices, falling temperatures and low inventories appeared to have had a combined effect on this growth.

Mortgage interest cost (+7.3%) continued to exert significant upward pressure on the all-items index. This was slightly faster than the 7.0% growth reported in November and was due more to a moderate rise in this component during the same period last year than to any recent changes in the economic fundamentals that underlie this index. The impact of the change in interest rates on the rise in this component was almost identical to that of the change in new housing prices.

Chart 3 Percentage change in mortgage interest cost from the previous month, Canada, not seasonally adjusted
Source(s):  CANSIM table number 326-0020.

The 4.4% increase in homeowners’ replacement cost, which represents the cost of maintaining a housing structure, also contributed to the rise in the cost of owned accommodation. The 12-month growth in this component observed in December was the most moderate since April 2002. This component has been decelerating since July 2007.

Over the last six months, the deceleration of homeowners’ replacement cost was especially pronounced in Alberta. In December 2007, this cost rose only 9.0% for Albertans, well below the record gain of 48.6% in September 2006.

In December, Canadians paid 2.7% more for food purchased from restaurants compared to the same month in 2006. This is in contrast to the smaller 1.1% increase reported for the food that consumers purchased in grocery stores over the same period. Much of this increase is attributable to the 4.6% rise in bakery product prices, reflecting the sharp rise of the price of wheat on international markets.

Lower prices for fresh fruit (-7.2%) and fresh vegetables (-4.7%) played a significant role in mitigating the 12-month rise in the food component. This decrease was observed during a season of the year when a considerable portion of such products are imported and at a time when the value of the Canadian dollar in relation to its U.S. counterpart was 13.0% higher compared to the same period last year. The drop in prices for oranges (-15.8%) and apples (-13.1%) was especially pronounced.

A 4.1% decrease in the price to purchase and lease a vehicle mitigated the increase in consumer prices. The particularly strong declines observed during the past two months are attributable to a continuation of discounts on the new 2008 models. Consumers paid relatively less for a number of 2008 models, compared with 2007 models at the same period in 2006. This decrease was observed following a substantial increase in vehicle imports by consumers from the United States.

Canadians also enjoyed a 13.7% reduction in prices for computer equipment and supplies and paid 8.0% less for video equipment, thanks to new technologies. The pronounced drop in prices for liquid crystal display screens and for laptop computers contributed to these declines.

In December 2007, Canadians spent 7.7% less for books and other printed material (excluding textbooks) compared to the same month last year. At the provincial level, decreases ranging from 8.6% to 18.8% were observed in all provinces except for Quebec, where prices for this component were up 7.2% and where the market for books differs.

The provinces: Biggest slowdowns in consumer prices are posted in Alberta and Saskatchewan

On a provincial basis, consumer prices decelerated in Alberta, where the 12-month increase was 4.1% during the twelve months to December compared with 4.7% in November. This slowdown can largely be explained by a 12.5% decline in natural gas prices in December following a 3.2% drop in November.

In Saskatchewan, the increase in consumer prices was 3.7% in December compared with 4.0% in November. A slowdown in homeowners’ replacement cost contributed to the deceleration in consumer prices in Saskatchewan. The 12-month increase in homeowners’ replacement cost slowed to 41.9% in December, down from the 43.7% rise reported in November. This component exerted the strongest upward pressure.

The 12-month increase in consumer prices of 1.2% in British Columbia was the weakest since October 2006. Gasoline prices there rose only 6.3%, the slowest gain of any province.

The fastest acceleration in the CPI occurred in Manitoba, where prices in December were up 2.0% compared with 1.7% in November, and in Nova Scotia, where the gain went from 2.8% to 3.1%. In both, the main contributor was a substantial increase in gasoline prices: 16.2% in Manitoba and 14.7% in Nova Scotia.

Monthly change: gasoline slows the rise of the all-items index

The rise in gasoline prices went from 4.0% between October and November to 1.7% between November and December. This deceleration helped slow the increase in the all-items index from 0.3% in November to 0.1% in December. However, gasoline prices were still the main contributor to the monthly increase.

The second main contributor was a 6.2% increase in prices for air transportation. This component generally rises during this period, but December’s rise was the fastest since December 2003. It was mainly attributable to higher prices for transatlantic flights and flights to Asia and the Pacific.

In December, Canadians had to spend 6.2% more for their fresh vegetables compared to the previous month. This type of price movement is typical during the winter months. The monthly price increase for tomatoes (+28.4%) was especially significant given that greenhouse production is waning.

The increase in mortgage interest cost remained at 0.8% for the fourth month in a row. The impact of higher rates for mortgage renewals was roughly the same as that of the rise in new housing prices.

Heating oil prices jumped 9.9% and represented another significant contributor of higher consumer prices. This was the fastest monthly growth since September 2005, when Hurricane Katrina disrupted activity in this sector.

The impact of these increases was partially offset by lower clothing prices, which are typically observed during this period of the year. Women’s clothing prices were down 4.7%. This decrease was mainly the result of discounts on underwear and winter apparel. Men’s clothing prices were also down in December (-3.2%). This decrease was largely owing to lower suit prices.

Lower prices for traveller accommodation (-2.4%) also dampened the rise in consumer prices. Such monthly reductions are commonly observed between November and December, a reflection of the low season in this industry. The most pronounced decreases were noted in Newfoundland and Labrador (-6.3%) and Nova Scotia (-4.9%).

Prices for books and other printed material (excluding textbooks) were also down significantly between November and December 2007 (-9.0%). The most substantial decreases were posted for paperbacks.

Prices for video equipment continued their downward trend, falling 3.8% between November and December, likely the result of Christmas specials.

Annual change: Consumer prices rose 2.2% in 2007

This release provides the annual average movement in components of the Consumer Price Index for 2007 as a whole. Annual average indexes are calculated by averaging index levels over the 12 months of the calendar year.

Annual averages should not be confused with the 12-month change in the CPI. This compares indexes for a given month to indexes for the same month a year earlier.

For 2007 as a whole, prices rose on average by 2.2%, compared with 2.0% in 2006. The increase in 2003 (+2.8%) was the biggest annual change increase since 1991.

The core index posts its lowest growth since December 2005

The Bank of Canada’s core index was up 1.5% in December 2007 over December 2006, down slightly from the 1.6% rate of growth recorded in the previous month. The slowdown of the core index stemmed partially from the change in prices for books and other printed material, which fell by 7.7% in December, a sharp contrast with the 3.3% increase reported in November. The 12-month rise in the core index posted in November is the lowest recorded since December 2005. In December, the strongest upward pressure on the 12-month change in the core index came from homeowners’ replacement cost (+4.4 %). The decline of prices for motor vehicles (-4.1%) partially offset the impact of this upward pressure.

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.

Between November and December 2007, the seasonally unadjusted core index decreased by 0.3% after remaining unchanged the previous month.

The energy index rises by 8.7%: falling natural gas prices partly offset the rise in prices for gasoline and heating oil

The energy index climbed by 8.7% during the 12-month period prior to December 2007, down from the 10.3% rise observed during the previous period. The strongest upward pressure on this index came from gasoline prices, which shot up 14.9% during this period. A record increase of 27.1% in prices for heating oil and other fuels also contributed to the increase of energy prices. To a lesser extent, the 9.6% increase in prices for fuel, parts and supplies for recreational vehicles also had a significant impact. The 1.4% decrease in natural gas prices mitigated the impact of these increases to some extent.

On a monthly basis, the energy index also slowed, rising by 1.2% between November and December 2007 following a 1.5% rise the previous month. This increase could largely be attributed to the 1.7% rise in gasoline prices and the 9.9% leap in prices for heating oil and other fuels. The 0.8% decrease in prices for natural gas dampened the effect of this upward pressure on the energy index.

Costs for owned accommodation continue to exert strong upward pressure on the services index

Prices for services rose by 3.5% between December 2006 and December 2007, up slightly from the 3.4% increase observed during the previous period. This rise is primarily the result of increases in mortgage interest cost (+7.3%) and homeowners’ replacement cost (+4.4%). The drop in prices for vehicle leases (-4.0%) partially mitigated this growth.

Seasonally unadjusted prices for services rose by 0.3% between November and December 2007, higher than the 0.1% level posted during the previous period. The strongest upward pressure on this index came from mortgage interest cost (+0.8%). The acceleration in the services index stems from a slowdown in the reduction of prices for traveller accommodation. Prices for this component went from -5.5% between October and November to -2.4% during the following period.

The seasonally unadjusted goods index rose by 1.2% during the twelve months prior to December 2007, down from the 1.4% increase posted in November.

Non-durable goods seasonally unadjusted (+3.4%) exerted the strongest upward pressure on the goods index. This increase was largely driven by gasoline (+14.9%), food from stores (+1.1%) and heating oil and other fuels (+27.1%). The 1.4% drop in natural gas prices served to moderate the rise in this index.

Higher prices for semi-durable goods (+0.7%) also contributed, though to a lesser extent, to steeper prices for goods. This rise was higher than the 0.2% increase reported in November. Higher prices for textbooks and school supplies (+3.6%) accounted for much of this growth. The impact of this component was partly offset by lower prices for books and other printed material (excluding textbooks) (-7.7%).

The durable goods index fell by 3.2%—the most pronounced decrease in this index ever recorded. This reduction was mainly the result of lower prices for automotive vehicles (-4.1%), computer equipment and supplies (-13.7%) and video equipment (-8.0%).

Between November and December 2007, the goods index was down 0.2%, following on the heels of 0.5% growth the previous month. The strongest downward pressure on this index came from semi-durable goods (-2.7%), driven by lower prices for women’s (-4.7%) and men’s clothing (-3.2%). During this period, prices for non-durable goods were up (+0.4%), while those for durable goods dropped 0.1%.

Seasonally adjusted CPI up 0.3% between November and December

On a seasonally adjusted basis, the all-items CPI advanced by 0.3% between November and December 2007, a pace of growth unchanged from last month. The December increase was mainly attributable to transportation (+0.7%) and, to a lesser extent, shelter (+0.3%).

The seasonally adjusted core index went up 0.1% between November and December 2007 after a decline of 0.1% over the previous period.

Impact of decline in Goods and Services Tax (GST)

Since the price changes measured by the CPI take into account the value of the consumption taxes paid by Canadians, the one percentage point decrease in the GST announced by the government to take effect in January will have an impact on the CPI in that month.

A rough estimation of this impact is that the rate of change would be lower by 0.6% than it otherwise would have been if the entire amount of the decrease is transferred to consumers through lower prices. To the extent that businesses raise their margins at the same time the impact could be correspondingly less. Also, if some businesses had already reduced their prices in anticipation of the coming GST reduction (e.g. car dealers), the impact in January would also be less.

Chart 4 Percentage change in the consumer price index from the same month of the previous year, Canada, 2002=100, not seasonally adjusted
Source(s):  CANSIM table number 326-0020.
Chart 5 Percentage change in the all-items index from the previous month, Canada, Whitehorse, Yellowknife and Iqaluit, 2002=100, not seasonally adjusted
Source(s):  CANSIM table number 326-0020.
Chart 6 Percentage change in the all-items index from the same month of the previous year, Canada, Whitehorse, Yellowknife and Iqaluit, 2002=100, not seasonally adjusted
Source(s):  CANSIM table number 326-0020.