Consumer Price Index

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The 12-month percentage change in the Consumer Price Index (CPI) was down for a second consecutive month, from 2.5% between June 2005 and June 2006 to 2.4% between July 2005 and July 2006. Prices were down slightly despite the 1.0% reduction in the goods and services tax (GST) that took effect on July 1.

The 12-month change in the All-items CPI excluding eight of the most volatile components identified by the Bank of Canada for the purpose of monetary policy rose 1.5% between July 2005 and July 2006. This movement represents a net decline in comparison with the 1.7% rise posted between June 2005 and June 2006. The 12-month change of this index in July 2006 was the lowest since July 2005.

Excluding energy prices, the 12-month increase in the CPI slowed down slightly, from 1.5% in June to 1.4% in July.

On a monthly basis, the CPI increased 0.1% in July. This suggests that price increase pressures were important enough in July to more than compensate for the expected effect of the 1.0% reduction in the GST.

The CPI release in The Daily on July 21, 2006, suggested that the CPI could fall by roughly 0.6% following the 1.0% reduction in the GST. Based on a simulation exercise, this estimation rests on the assumption that the entire amount of the decrease is transferred to consumers and that the industrial structure that underlies the way that prices are determined remains the same. In addition, this measure of impact does not take into account the increase in the Federal excise taxes on tobacco products and alcoholic beverages announced by the government.

The 4.6% gasoline price increase between June and July partly explains the 0.1% monthly advance. Other economic factors, such as the reaction of some retailers to changes to the GST, adjustment lags and the seasonal increase of some prices may have contributed to mitigate the expected downward pressure on the CPI resulting from the GST reduction. It is, however, difficult to quantify their individual impact.

For a second consecutive month, the All-items index excluding energy slipped 0.2%. The same trend was observed for the All-items index excluding eight of the most volatile components identified by the Bank of Canada. The latter slid 0.2% between June and July, a change identical to that of the previous month.

Higher gasoline prices still major factor in 12-month change

In July 2006, the CPI climbed 2.4% over July 2005, less than the 2.5% increase posted the previous month. Higher gasoline prices accounted for most of this increase, followed by the rise in homeowners' replacement cost, the cost of purchasing and leasing automotive vehicles, and electricity prices. These increases were partly offset by lower prices for computer equipment and supplies, women's clothing, video equipment and men's clothing.

Gasoline prices climbed 16.1% between July 2005 and July 2006, up from the 15.4% leap between June 2005 and June 2006. The steep rise in the price of a barrel of oil on world markets was the main reason behind the higher prices paid by consumers at the pump last year. Aside from Prince Edward Island, the provinces registering increases higher than the national index were all situated west of Ontario. Saskatchewan posted the largest jump (+19.2%) while drivers in Newfoundland and Labrador faced the lowest increases (+11.1%) in the country.

Homeowners' replacement cost, which represents the worn-out structural portion of housing and is estimated using new housing prices (excluding land), rose by 7.6% from July 2005 to July 2006. Most of the increase originated from the special situation in Alberta, where prices have skyrocketed 40.2% over the past year. The boom in that province is stimulating housing starts, thus exerting upward pressure on material and labour costs and contributing to the rise in the CPI. Saskatchewan was a distant second, with a 12-month increase of 7.5% in July.

Prices for the purchase and leasing of automotive vehicles were up 2.4% in July compared with the same month last year. Although consumers only occasionally purchase or lease an automotive vehicle, the value of the transaction represents an important share of the average expenditures of Canadian households as a whole, which explains its influence on the All-Items index.

Electricity prices climbed 6.3% from July 2005 to July 2006. This increase is attributable mainly to increases in Ontario, Alberta, Quebec and British Columbia over the past year. Between June and July, although the GST reduction effects were felt in all provinces, they were totally offset by higher tariffs in Newfoundland and Labrador, British Columbia, Alberta and Prince Edward Island. As a result, the national index for electricity went up 0.5% between June and July.

Confirming the trends observed for a while now, information technology products contributed to mitigate upward pressures from energy and shelter prices, thus moderating the 12-month growth in the All-Items index. The index for computer equipment and supplies plunged 17.1%, while that for video equipment dropped 11.6%. The combined effects of technological progress, as well as the appreciation of the Canadian dollar (which encourages imports of goods), lowered prices for computers, televisions and video players.

Men's clothing prices dropped 3.7% from July 2005 to July 2006, in comparison with women's clothing which fell 3.4%. The strong dollar enabled Canadian consumers to pay less for clothing. These items are often imported from Asian countries like China and India, where production costs are known to be globally competitive.

GST reduction offset by price increases in July

After slipping 0.2% between May and June, the All-items index was up 0.1% from June to July 2006. The upward pressure on the CPI came mainly from gasoline and fresh fruit. The purchase and leasing of automotive vehicles, restaurant meals and telephone services were the most significant factors in offsetting this upward movement.

After dropping slightly the two previous months, gasoline prices rose 4.6% between June and July despite the GST reduction. The largest increases were in Quebec (+6.5%) and Alberta (+6.4%), while Newfoundland and Labrador (+0.9%) and British Columbia (+1.5%) recorded the smallest advances.

The upward trend of fresh fruit prices continued for the third month in a row, climbing 7.4% between June and July. Since April, fresh fruit prices have shot up 18.1%, the most substantial increase for the same period since 1990. In July, prices for oranges, grapes, apples, pears, and pineapples have increased, pushing up the fresh fruit index.

Mitigating the upward trend in the monthly index to some degree, prices for the purchase and leasing of automotive vehicles were down 1.0% in June. The 1.0% reduction in the GST in July had a more significant impact on the decrease in automotive vehicle prices than the financial incentives offered by some car manufacturers to diminish their inventories.

The 0.7% decline in prices for restaurant meals also served to push down the All-items index, as did the 0.9% drop in the cost of telephone services. The lowering of the GST accounts for much of the downward movement in these two components, which have a relatively important weight in the CPI basket.

Alberta stands out once again

In July, Alberta continued to set itself apart by posting the largest 12 month increase in the CPI, at 4.3%. Since early 2006, Alberta has recorded 12-month changes of more than 3%, reflecting the flourishing economic activities in the province. The rise in the Albertan index was mainly the result of the appreciation in the prices of the shelter components which are weighted fairly heavily in the CPI. The increases in homeowners' replacement cost, homeowners' insurance premiums, mortgage interest cost, and electricity have led to the substantial rise in the CPI in Alberta, despite an important fall in natural gas prices. This situation contrasts with that of other provinces for which CPI increases are mainly fuelled by the gasoline price hikes.

Excluding shelter, the 12-month increase in the All-Items index was 2.4%. This rise is more comparable with increases in other provinces, which fluctuated between 1.6% and 3.2%.

The seasonally adjusted CPI increased from June to July

After adjusting for seasonal variations, the CPI increased 0.1% between June and July 2006. The upward pressure came from the transportation (+0.8%), shelter (+0.3%) and food (+0.2%) components.

The downward pressure on the seasonally adjusted index came from household operations and furnishings (-0.6%), recreation, reading and education (-0.5%), clothing and footwear (-0.4%), health and personal care (-0.4%) and alcoholic beverages and tobacco products (-0.1%).

The seasonally adjusted CPI without eight of the most volatile components identified by the Bank of Canada dropped 0.2% between June and July 2006.

All-items index excluding eight of the most volatile components

One of the elements used by the Bank of Canada to measure core inflation for the purpose of monetary policy is the CPI without eight of the most volatile components identified by the Bank. These volatile components are fruit, fruit preparations and nuts; vegetables and vegetable preparations; mortgage interest cost; natural gas; fuel oil and other fuel; gasoline; inter-city transportation; and tobacco products and smokers' supplies.

The 12-month increase in this index was 1.5% in July 2006. The major factors that contributed to this rise were homeowners' replacement cost (+7.6%), the purchase and leasing of automotive vehicles (+2.4%), electricity prices (+6.3%) and prices for restaurant meals (+2.1%). The increase was mitigated by lower prices for computer equipment and supplies (-17.1%), women's clothing (-3.4%), video equipment (-11.6%), and men's clothing (-3.7%).

Between June and July 2006, the All-items index excluding eight of the most volatile components identified by the Bank of Canada was down 0.2%, matching the decline of the previous month. The purchase and leasing of automotive vehicles (-1.0%), restaurant meals (-0.7%) and telephone services (-0.9%) were the primary sources of this decline. Those three components were down largely as a result of the GST reduction.

Energy

In the wake of 12-month increases of 14.1% in May and 11.5% in June, the energy index continued to decelerate, posting a relatively smaller increase of 10.6% in July. Aside from natural gas, all components contributed to the rise in the energy index, with gasoline (+16.1%) playing the largest part, followed by electricity (+6.3%), fuel oil (+12.1%), and fuel, parts and supplies for recreational vehicles (+10.1%). Natural gas prices were nonetheless down by 3.3% in July, largely owing to the 18.8% drop in Alberta.

On a monthly basis, the energy index climbed 2.6% between June and July 2006, despite the 1.0% decrease in the goods and services tax that applied to all energy components of the CPI. Rising gasoline prices (+4.6%) explained most of the upward movement in the index. Higher prices for electricity (+0.5%), natural gas (+0.5%), and fuel, parts and supplies for recreational vehicles (+1.8%) also pushed the index up. Lower fuel oil prices (-1.3%), however, exerted a dampening effect. It should be noted that natural gas prices varied widely in July, with Alberta posting a 44.8% increase and Ontario a 10.3% drop.

Available on CANSIM: tables 326-0001, 326-0002, 326-0009, 326-0012 and 326-0016 to 326-0018.

Definitions, data sources and methods: survey number 2301.

More information about the concepts and use of the CPI are also available online in Your Guide to the Consumer Price Index (62-557-XIB, free), which is available from the Publications module of our website.

Available at 7 a.m. online under The Daily module, then Latest Consumer Price Index.

The July 2006 issue of the Consumer Price Index, Vol. 85, no. 7 (62-001-XIB, free) is now available from the Publications module of our website. A paper copy is also available (62-001-XPB, $12/$111).

The August 2006 Consumer Price Index will be released on September 19.

For more information, or to enquire about the concepts, methods or data quality of this release, call Client Services Unit (toll-free 1-866-230-2248; 613-951-9606; fax: 613-951-1539; prices-prix@statcan.gc.ca), Prices Division.

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