HST increases Canada's Inflation rate in July 2010
The Consumer Price Index report indicated that the head line inflation index went up by .5% in July mainly reflecting the harmonization of provincial and also federal sales taxes in Ontario and British Columbia. This was basically anticipated by forecasters. Consequently, the year-over-year inflation rate practically doubled, now at 1.8% from 1.% in June.
During the month of July, prices for electricity, traveler accommodation and gasoline rose. These increases were offset by affordable prices for clothing and passenger vehicles. The seasonally adjusted all-items index posted a .6% surge in July. Compared to last year, the most significant increases were registered in passenger vehicle insurance monthly premiums and homeowners' replacement unit costs, electricity as well as gas. Moderating the actual impact of these increases have been lower mortgage interest costs, air travel and women's clothing prices. The harmonization of the sales as well as federal taxes broadened the actual tax base both in Ontario and British Columbia to include the similar goods and services taxed through the GST with a few provincially unique exceptions.
Due to the tax harmonization, Ontario's inflation rate went up by 2.9% from 1.6% in June. Prices rose .9% during the month with gasoline prices, electrical power costs and auto insurance fees increasing rapidly. Similarly, British Columbia's inflation rate rose to 2.% in July from .5% in June with the index soaring 1.1% in July.
The tax-related spike in Canada's headline inflation rate in July won't have considerable implications for fiscal policy since the increase is really a one-time component that will impact the rate from July 2010 to June 2011 and subsequently it will drop out from the calculation. Specifically, we are looking to check if the cost savings which will accrue to companies through the input tax credits will progressively end up being carried to consumers. Provided the impact of the tax harmonization, the key measure provides a far better read on inflation pressures in the economy. The 1.6% increase in the core index has been the slowest increase in 2010. Statistics Canada considered a complete pass through (.5% on a core basis) which means that the retailers passed over the full-tax increase within July. To the extent that merchants didn't do this, it's going to bias down the core measure. The seasonally adjusted core measure rose .1% again in July. We expect that in the coming months, you will see some downwards drift in core prices as producers give cost savings using their ability to claim HST refunds; nevertheless, most of these declines will probably be balanced out through a gradual surge in prices consistent with the narrowing of the output gap.
Recently available economic reviews tend to be consistent with the actual rate of growth in Canada's economy moderating following the strong gains in the 4th quarter of 2009 and very first quarter of 2010. Despite a modest improvement in the rate of growth, the level of Gross domestic product will probably remain over it's pre-recession high. RBC is keeping track of a 2.5% annualized gain within the 2nd quarter. The banner increases in recruitment (in spite of the crazy month-to-month ups and downs) furthermore suggests that Canada's economy is on firm footing. Against this backdrop, we expect the Bank to stay with a gradualist strategy in moving rates of interest upward from their emergency lows and peruse for an additional 25-basis point rise on the subsequent fixed-action date on Sept 8, '10. Anxiety concerning the momentum in the worldwide markets, specifically the U.S., overall economy could see the Bank temporarily halt in the rate-hike cycle at the future meetings, and that we are projecting interest rate increases at 2 of the 3 outstanding meetings in 2010.
adapted from Dawn Desjardins, Assistant Chief Economist, RBC Economics