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TD Economics
Commentary
January 23, 2009

INFLATION FALLS TO 1.2% IN DECEMBER

• All items inflation plummets to 1.2% from 2.0% CONSUMER PRICE INDEX - CANADA
in November on falling gasoline prices Dec-08 Nov-08 Dec-08 Nov-08
• Core price steady at 2.4% % Chg. % Chg. % Chg. % Chg.
M/M M/M Y/Y Y/Y
Canadian consumer price inflation continued to mellow in All-items* -0.4 -0.3 1.2 2.0
Core ex. indirect taxes* 0.0 0.6 2.4 2.4
December on the back of falling gasoline prices, dropping to
Goods -1.5 -0.7 -0.8 0.5
1.2% from 2.0% in November. Core consumer price infla- Services 0.1 0.0 3.1 3.3
tion remained steady at 2.4%. The perseverance in the core Energy -5.9 -11.4 -11.0 -4.2
rate is more reflective of the strong downward pressure on Food* 0.3 1.0 7.3 7.4
core prices one year ago, rather than any signal of renewed Shelter* 0.0 0.2 3.5 3.9
Transportation* -2.6 -3.2 -6.1 -3.0
price pressures today. Still, it is stunning just how quickly things Clothing & Footwear* -0.3 0.4 -2.6 -2.4
can change on the inflation front and a far cry from the situ- *M/M uses seasonally adjusted data; Source: Statistics Canada
ation in mid-2008 when rising food and energy prices were
pushing headline inflation away from core in a major way. As yesterday’s Monetary Policy Report Update from the
It is always a good idea to look at the sources of the price Bank of Canada (BoC) noted, the hefty build up of slack as
pressure in forming expectations of future price growth. Ear- the Canadian economy enters recession will continue to put
lier in the year, our belief that energy prices had gotten ahead downward pressure on inflation in Canada over the next year.
of underlying fundamentals formed our belief that the rise in In fact, it is only with a very strong and relatively quick re-
headline inflation would likely be relatively short lived. Simi- bound in economic growth in 2010 that inflation returns to the
larly, in the current environment core inflation has been pushed banks target rate of 2.0% in 2011 (the BoC expects eco-
up by the elimination of price incentives on motor-vehicles in nomic growth of 3.8% compared to TD’s forecast of 2.4%).
late 2008 (which, once again, calls to mind the impact of the What is equally important in determining the actual path of
Canadian dollar at parity with the U.S. in late 2007). But this inflation, is inflation expectations and recent signs, such as the
is a short lived phenomenon. Motor vehicle sales plummeted spread on inflation adjusted bonds, show that if anything get-
in Canada at the end of 2008 as demand waned and if any- ting back to target may take longer than the central bank
thing a return to incentive pricing can be expected. anticipates. Given the stresses on the Canadian economy from
Regionally, consumer prices trended down across the falling household wealth and more moderate personal income
country, no more so than in the Atlantic region. Year-over- growth, and the external pressure on exporters during the
year inflation actually turned negative in New Brunswick (- global economic recession, inflation is likely to come in below
0.6%) and Nova Scotia (-0.2%), while in PEI the rate stood the Bank of Canada’s expectations, prompting one more half
at an even 0.0%. But even Alberta, at 1.9%, has seen the percentage point rate cut in March.
core rate come below 2.0%. Only Saskatchewan, at 2.6%
remains above the 2.0% level and even here prices are clearly James Marple, Economist
on a downward trend. 416-982-2557

TD Economics Commentary January 23, 2009

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TD Economics Commentary January 23, 2009