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Canwest News Service
Published: Thursday, August 21, 2008

OTTAWA - Higher gasoline prices pushed Canada's annual inflation rate to a five-year high of 3.4 per cent in July from 3.1 per cent the previous month, Statistics Canada said Thursday.

The increase in last month's consumer price index was in line with most economists' expectations.

"July saw the highest 12-month increase since March 2003. A climb in gasoline prices was the primary source of higher consumer prices in July," the federal agency said.

Prices at the pump were up 28.6 per cent last month from a year early, it said.

"Besides higher prices for gasoline, price increases for other energy components, such as fuel oil and other fuels and electricity, rose sharply in Newfoundland and Labrador, Prince Edward Island and Nova Scotia in the 12 months to July," the agency said.

"The rise in these energy components largely accounted for the growth in consumer prices posted in these province."

On a monthly basis, prices rose 0.3 per cent in July from June, down from a 0.8 per cent increase from May to June.

Mortgage costs were up 8.5 per cent in July from a year earlier, down from a nine per cent annual pace in June. "The slowdown in the rise in mortgage interest cost was due more to a softening of new housing prices rather than to lower mortgage interest rates," the agency said.

Prices for food purchased from stores rose 4.3 per cent from July 2007, led by a 13.2 per cent jump in the cost of bakery products.

Overall, consumers were hardest hit in Prince Edward Island, where year-on-year inflation rose 5.3 per cent, Newfoundland and Labrador, up 4.2 per cent, and Nova Scotia, up 4.2 per cent.

"While consumers across the country faced higher prices for gasoline and mortgage interest costs, lower prices to purchase and lease passenger vehicles helped to offset these price increases," Statistics Canada said. "Changes in prices to purchase and lease passenger vehicles ranged from a 7.6 per cent decrease in Quebec to an 11.4 per cent decline in New Brunswick."

The core price index - which strips out volatile items such as energy and certain foods, and is used by the Bank of Canada to monitor the impact of inflation - remained at 1.5 per cent, on a year-on-year basis, for a fourth consecutive month. From June to July, core prices edged up 0.1 per cent, after a gain of 0.3 per cent from May to June.

The Bank of Canada has forecast that inflation will peak at 4.3 per cent in the first quarter of 2009 as energy prices continue to fuel consumer costs. However, the central bank is expected to keep its trend-setting interest rate at three per cent as it focuses on spurring economic growth, with inflation pressures expected to ease.

"This report offers no big surprises, which is a good thing in light of the high-side shocks seen in many other CPI releases around the world in recent months," said Douglas Porter, deputy chief economist at BMO Capital Markets.

"And while headline inflation is now running at its fastest pace in more than five years, it is still near the bottom of the pack globally - and more than two points below the current U.S. pace," he said.

"Lower gasoline prices suggest that headline inflation will pull up short of the Bank of Canada's earlier projection of four-per-cent-plus inflation, but tough year-ago comparisons in the next few months also suggest that a fast retreat in inflation is unlikely."

Charmaine Buskas, economics strategist at TD Securities, said the July report "is probably the last opportunity for energy prices to make a significant contribution to inflation as commodity prices have fallen quite dramatically over the past month and are likely to exert a moderating influence on CPI going forward."