Analysis

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Consumer prices rose 1.2% in the 12 months to December 2008, more slowly than the 2.0% increase in November. It was the smallest increase since January 2007 and reflected a sharp decline in the price of gasoline.

Gasoline prices in December 2008 were 25.8% below levels in the same month the year before. This was the largest drop since the inception of the gasoline price index in 1949 and followed a 14.4% drop in pump prices in November.

Excluding gasoline, the CPI rose 2.6% in the 12 months to December, down slightly from the 2.8% increase in November.

The 12-month change in the CPI was also tempered by on-going price declines for purchasing and leasing passenger vehicles, women’s clothing and fuel oil and other fuels.

The most significant upward contributor was mortgage interest cost, despite a recent decrease in mortgage interest rates. Increasing prices for natural gas and various food items, particularly fresh vegetables and bakery and cereal products, also put significant upward pressure on consumer prices in December.

Despite the increase in prices for natural gas and electricity, price declines for gasoline and fuel oil and other fuels sent energy prices falling 11.0% in December, the largest drop since December 2001.

Although the increase in consumer prices slowed at the end of 2008, consumers paid 2.3% more for the goods and services in the CPI basket in 2008 than in 2007 on an annual average basis, up from the 2.2% annual increase posted in the previous year. ¹  Higher prices for energy items, mortgage interest costs and various food items, particularly those associated with grain, were primarily responsible for the rise.

On a seasonally adjusted monthly basis, consumer prices fell 0.4% from November to December, following the monthly declines of 0.3% in November and 0.6% in October. As in the previous months, December’s decline reflected price decreases for transportation items, which far offset rising food costs.

12-month change: Steady increase in food prices

Of the eight major components in the CPI, five recorded increases in the 12 months to December: food, shelter, health and personal care, household operations, furnishings and equipment, and alcoholic beverages and tobacco products.

The largest upward contributor was increasing food prices, followed by rising shelter costs.

A decline in the transportation price index substantially offset rising prices for food and shelter items. Persistent price declines for clothing and footwear items also helped to temper consumer price increases in the 12 months to December.

Food prices increased 7.3% during the 12-month period, following a 7.4% increase in November. Excluding food, the CPI posted no change in the 12 months to December. This was the weakest pace registered for this index since November 2001.

The underlying factor for rising prices for food was sustained price increases for food purchased from stores. Prices for food purchased from stores rose 9.0% in December, identical to November’s increase. The main contributor was a 26.9% increase in prices for fresh vegetable items, products which are largely imported.

Persistent price increases for bakery and cereal products also contributed to rising prices for food purchased from stores. Bakery and cereal product prices rose 12.4% in the 12 months to December, slightly down from the 12.9% rise posted in November. December’s slowdown is due primarily to slower price increases for rice and flour items.

Shelter costs remained the second largest contributor to the increase in the CPI, propelled by higher mortgage interest costs and natural gas prices. Shelter costs rose 3.5% in December, down from the 3.9% increase posted in November. The slowdown primarily reflected price declines for fuel oil and other fuels, as well as slower increases in mortgage interest costs.

While mortgage interest costs were up 6.4%, the pace of change has been slowing as a result of a slowdown in new housing prices and easing interest rates.

Natural gas prices rose 18.4% in December, following a 16.8% gain in November. The only components of shelter to decline were prices for fuel oil and other fuels (-13.5%) and tenants’ insurance premiums (-0.4%).

Thanks primarily to the sharp 25.8% drop in gasoline prices, the transportation price index declined 6.1% in December. This was its second consecutive drop and the largest decline since the inception of the index in 1949.

Also contributing to the drop in transportation costs was a 3.5% decline in prices for purchasing and leasing passenger vehicles, which followed a 2.7% decline in November. These declines were slightly offset by a 4.4% increase in prices for passenger vehicle insurance and a 6.1% rise in air transportation prices.

The clothing and footwear price index continued its downward trend, falling 2.6% in December. Both men’s and women’s clothing and footwear components contributed to the drop.

Provinces: Prices drop in New Brunswick and Nova Scotia on a 12-month basis

Consumers in two Atlantic Provinces witnessed an outright drop in consumer prices in the 12 months to December. In New Brunswick, average prices in December 2008 were 0.6% below levels in the same month a year earlier. In Nova Scotia, the 12-month decline was 0.2%.

This was the first time since October 2006 that the 12-month price change in any province fell into negative territory.

In addition to the large drop in gasoline prices in these provinces, a second major contributor was a sharp decline in the 12-month price change of fuel oil and other fuels. These energy products are used in great intensity in home heating in New Brunswick and Nova Scotia.

Excluding energy, consumer prices in Nova Scotia and New Brunswick rose 1.9% and 1.8%, respectively. These increases were much lower than the 2.6% national rate of change.

Among the provinces, consumer prices in Saskatchewan (+2.6%), Manitoba (+1.9%) and Alberta (+1.9%) advanced at the fastest pace.

The change in consumer prices during the past 12 months slowed in every province, reflecting falling gasoline prices. Gasoline price declines ranged from 29.9% in Prince Edward Island to 20.6% in British Columbia.

Most of the upward pressure in prices came from higher shelter and food costs. The main items driving this pressure were mortgage interest costs, energy products associated with housing, fresh vegetables and bakery and cereal items.

Seasonally unadjusted month-to-month change: Third consecutive monthly drop in consumer prices

Consumer prices fell a further 0.7% from November to December, after falling 0.3% from October to November. This was the fourth month-to-month contraction posted in the CPI in the past five months.

December’s decline was due primarily to a further contraction in gasoline prices. Gasoline prices fell 11.8% in December, after posting back-to-back monthly declines of 21.4% and 13.4% in November and October, respectively. The three month-to-month declines in prices for gasoline are the largest span of drops on record.

Price declines for men’s clothing (-5.3%), purchase and leasing passenger vehicles (-0.8%) and fuel oil and other fuels (-12.0%) also helped to ease consumer prices in December.

Putting upward pressure on consumer prices in December were price increases for air transportation (+5.6%) and fresh vegetables (+4.6%).

While all provinces posted a contraction in consumer prices in December, the largest declines were realized in Prince Edward Island (-1.9%), Nova Scotia (-1.4%) and New Brunswick (-1.2%). Strong price declines for gasoline and fuel oil and other fuels had a greater contribution on consumer prices in these provinces than the rest of the country.

Alberta (-0.3%) posted the smallest decline in consumer prices, as increasing costs for electricity, natural gas and mortgage interest tempered the overall decline in other components, particularly gasoline.

Seasonally adjusted month-to-month change: Prices continue to fall

On a seasonally adjusted monthly basis, consumer prices in Canada fell 0.4% from November to December, following monthly declines of 0.3% in November and 0.6% in October. As in the previous months, December’s decline reflected price decreases for transportation items (-2.6%), which far offset rising food costs (+0.3%).

Excluding food, the seasonally adjusted CPI fell 0.6% from November to December, after falling 0.7% in the previous period.

Inflation in the Bank of Canada’s core index holds steady on a 12-month basis

The Bank of Canada's core index advanced 2.4% over the 12 months to December, identical to the rise in November. The main contributors to the increase in the core index were higher prices for bread, cereal products and meat products. Price declines for purchasing and leasing passenger vehicles remained the primary downward contributor.

On a month-to-month basis, the core index prior to seasonal adjustment fell 0.4% from November to December, following the sharp 0.7% rise in the previous period. Large price declines for purchasing and leasing passenger vehicles were primarily responsible for the monthly slowdown.

The seasonally adjusted monthly core index posted no change from November to December, after rising 0.6% from October to November.

Annual 2008: Fastest average increase in prices since 2003

On average for 2008 as a whole, consumer prices increased 2.3%, slightly faster than the annual average increase of 2.2% the year before. This was the highest rate of change since the annual average increase of 2.8% in 2003. The increased momentum between 2007 and 2008 was due primarily to higher average annual prices for energy and food components.

Major contributors to the increase in 2008 were higher prices for food and energy products and mortgage interest costs.

Tempering the increase were substantial declines in prices for passenger vehicles, clothing and footwear products and various electronic items.