Energy prices fuel Canada's inflation jump  March inflation rate hits three per cent, dollar sags  Economic News  Forum Is Canada's economy red-hot or not?

OTTAWA, April 17 (Reuters) - Canada's annual inflation rate climbed to 3.0 per cent in March as energy prices soared, but analysts said on Monday the decline in the less volatile core rate showed inflation was still under control.

The overall rise in prices, up from a 2.7 per cent year-on-year rise in February, marked the highest inflation rate since May 1995. The increase in prices slightly surpassed market expectations of 2.9 per cent inflation.

Economists, who predict the Bank of Canada will match an expected rate increase by the U.S. Federal Reserve on May 16, said the tame core inflation may mean the central bank will not have to act too aggressively to dampen the economy.

The bank targets a core measure that excludes volatile food and energy. That rate declined to 1.5 per cent in March, down from 1.6 per cent in February, well within the bank's 1 per cent to 3 per cent target range.

"The drop in the core is a welcome development," said Bank of Montreal assistant chief economist Paul Ferley.

"There had been concern that with energy prices rising, was it going to start making its way into other prices, either through higher energy costs or through starting to raise inflationary expectations. The core actually dropping on the month provides some reassurance that that's not taking place."

Finance Minister Paul Martin, speaking to reporters following the spring meeting of the World Bank in Washington, said inflation appeared well contained.

"I don't think people are particularly surprised by those numbers, and we've known about the effect of rising energy prices and we knew that eventually they would have an effect," Martin said.

"And of course the core rate is very very stable and in fact it would appear that energy -- which obviously has a direct effect -- the indirect effect was not as strong as people might have thought. So I think that our inflation rate is well contained."

Global energy prices have soared in recent months as OPEC nations adjusted crude oil supply levels.

A Statistics Canada official said prices often rise in February and March, but Toronto-Dominion Bank senior economist Marc Levesque also cited evidence, as emerging in U.S. data, that higher energy prices were starting to seep through to other related sectors such as transportation.

Levesque said the Bank of Canada was almost sure to follow a 25 basis-point rate hike by the U.S. Fed next month, but there is still uncertainty over whether it would match a steeper increase.

"I think there's probably a good chance that they'll follow the Fed on May 16. There's still some doubt in my mind as to whether the Bank of Canada will follow the Fed if it starts to take a more aggressive stance," Levesque said. Similar inflation data out of the United States on Friday had helped send the markets into a tailspin on concerns the Fed might have to tighten dramatically.

But Marcel Kasumovich, associate economist at Goldman Sachs Canada, was sanguine: "We've seen energy prices on the rise for an extended period, and we just really haven't seen any dramatic feed through to wage pressures or other goods and services to any meaningful degree."

http://www.canoe.ca/MoneyEconomic/eco_apr17_inflation.html

-- Carl Jenkins (Somewherepress@aol.com), April 17, 2000

Answers

March inflation rate hits three per cent, dollar sags

 Inflation soars in March, core stable  Economic News  Forum Is Canada's economy red-hot or not?

OTTAWA (CP) -- Energy prices pushed the annual rate of inflation to three per cent in March from 2.7 per cent in February, Statistics Canada said Monday.

But the core inflation rate, which ignores volatile energy and food prices, slipped to 1.5 per cent, from 1.6 per cent.

"The core rate, really, is very, very stable," Finance Minister Paul Martin told reporters at the close of IMF-World Bank spring meetings in Washington, D.C.

"In fact it would appear that energy, which obviously has an indirect effect (on core prices), was not as strong as people might have thought.

"I think our inflation rate is well contained."

The core numbers were reassuring for Canadian market investors who watch inflation nervously for signs of looming interest rate hikes.

On Friday, higher-than-expected inflation numbers in the United States triggered a massive stocks selloff -- mostly of high-tech stocks -- that wiped out more than $1 trillion of value on North American exchanges.

However, the inflation figures coincided with a drop in the Canadian dollar, which fell to its lowest level in six months.

The loonie closed Monday at 67.31 cents US, down O.42 cents U.S. on North American currency markets. Analysts differed on the reason for the dollar selloff.

Some say currency traders are moving to the U.S. dollar, attracted by the prospect of more interest rate hikes in the United States. Others suggest nervous traders are simply flocking to the U.S. greenback for stability.

Warren Lovely, an economist with CIBC, said investors don't believe the Bank of Canada will necessarily match expected interest rate hikes -- which keep inflation in check -- by the U.S. Federal Reserve.

The Bank of Canada wants to keep core inflation between one and three per cent.

"What we saw last week in the U.S. numbers was a stronger-than- expected core inflation rate, raising the prospect of perhaps three more Fed rate hikes over the balance of the year," Lovely said.

"Here at home, we're seeing a different story emerging.

"The evidence on core prices still suggests there really is no significant, underlying price pressure in Canada, outside of energy."

The TD Bank's Marc Levesque said the Bank of Canada doesn't face the same problems as the Fed.

"I don't think it's a done deal that the Bank of Canada follows every single interest rate hike by the Federal Reserve," he said.

Rob Palombi, an analyst with Standard and Poor's MMS, suggested currency traders are more worried about volatile world equity markets and are looking for a safe haven in the U.S. dollar.

"It has to do with the volatility in global stock markets," he said. "I don't think anybody really questions whether the Bank of Canada is going to match the next move by the Fed."

Although rising gasoline and fuel oil prices were the single biggest factor in driving up the consumer price index when compared with March 1999, they may now have peaked.

On a month-to-month basis, inflation jumped 0.7 per cent between February and March, the largest such increase since the GST was introduced in 1991. More than half that increase was due to gasoline prices.

With oil prices slipping, inflation will likely sag.

"There's no inflation spiral about to happen in Canada," said Palombi.

There were some other factors in inflation in March. Mortgage costs, restaurant food and tuition fees all went up.

Women's clothing also jumped in March, as summer stocks came in and retailers ended discounts offered the months before.

The cost of travel tours rose 5.8 per cent, in keeping with normal seasonal fluctuations.

However, the cost of fresh fruit and vegetables and computer gear dropped.

One good omen was that the composite index, a leading indicator of economic health, grew 1.1 per cent in March, reflecting strong consumer demand.

http://www.canoe.ca/MoneyEconomic/eco_apr17_inflation2.html

-- Carl Jenkins (Somewherepress@aol.com), April 17, 2000.