Gas may be cheaper, but otherwise prices are still on the rise

If anyone thought Canadians filling up with gas this week would be thrilled by the fact that fuel prices are the reason why inflation has declined, well, for the most part, they’re not.

“It’s too high.” said Cameron Benn paid $1.66 per Liter Tuesday as he filled his truck. “It sounds so cheap, it’s just crazy.”

In relative terms, there is no question the price of gas is a lot cheaper right now than it was earlier this year. That $1.66 is down from more than $2 a litre just a couple of months ago.

But it’s still more expensive than it was a year ago — and drivers have long memories.

Prices continue to rise year after year

Canadians consume a lot of gasoline because they live in a large country with long driving distances. So even what Statistics Canada called a “slower year-over-year growth in gasoline prices” was enough to bring Canadian inflation down in July, dropping from 8.1 to 7.6 per cent.

But for anyone who travels by transit, bikes, walks or drives an electric car, the fall in inflation has not affected them one bit. For those who don’t use gasoline, inflation is actually higher than ever. For those with a fixed income or whose incomes are not keeping up with inflation, the situation is even worse.

“Excluding gasoline, prices rose 6.6 per cent year over year in July, following a 6.5 per cent increase in June, as upward pressure on prices remained broad-based,” Statistics Canada reported on Tuesday.

The problem is our old friend “everything inflation,” which the statisticians call core inflation, because it leaves out all the things that shoot up and down, like pump prices. Core is still out of its target range and trending upward.

Two problems result. One is that consumers, many of whom are already convinced that inflation is much higher than Statistics Canada is reporting, will still see prices on day-to-day purchases continue to rise.

The second, as several economic commentators suggested after the consumer price index was released, is that we should expect the central bank to keep hiking interest rates.

Volatile gas

While the Bank of Canada is focused on the headline number of inflation that we report in the media, the central banks prefer to use core since it gives a better indication of long-term inflation and inflationary forecasts.

It is not clear that recent rate hikes by the Bank of Canada caused gas prices to fall. Gas prices depend on the global oil price, global demand and international politics — all of which are volatile.

As Benn said, he’s worried that gas prices could rise again.

That means if it really is mostly gas that’s driving inflation lower, there is little evidence the Bank of Canada’s rate rises have so far had an effect.

According to Stephen Brown, chief Canadian economist at the international firm Capital Economics, rising core inflation may mean Bank of Canada governor Tiff Macklem will not scale back his expected interest rate hike at his next monetary policy announcement, as many may have hoped.

“Amid continued upward pressure on core prices, the bank may still opt for a 75 basis-point interest rate in September, rather than the 50 basis-point move now largely priced into markets,” said Brown. (Seventy-five base points equals three quarters of a percentage.

Psychological impact

Economists at the Conference Board of Canada suggest that lower gas prices will have beneficial effects on inflation overall and that the Bank of Canada may want to take into account.

Like other economists. said in the past, core inflation is usually driven by two things. One is that volatile goods, like fuel, can feed back into the price of everything else, because almost everything we buy has an energy component; lower fuel costs should eventually pull down other core prices. Another is that inflationary expectations are higher when headline inflation increases. This can lead to higher wages and prices.

But as fuel prices and headline inflation decline, they will have an opposite psychological effect, said Conference Board economist Kiefer Van Mulligen. 

“Fluctuations in gas prices disproportionately impact consumer perceptions about inflation.” said Van Mulligen. “The flurry positive headlines that are likely following [Tuesday’s] The release could also be used to calm the anxiety of animals that have been disturbed by Canadian consumers this year.

While the effect on Keyesian animal spirits may be beneficial, Van Mulligen is also wary of the continued rise in core inflation, which he says indicates that Canada’s price-growth problems aren’t yet in the rear-view mirror.

After inflation, real interest rates are still extremely low even after successive increases.

Van Mulligan said there is a long way to go before the Bank of Canada gets inflation back to its target range, Macklem’s recent one percentage point increase in rates is unlikely to be repeated.

He stated that although interest rates are unlikely to rise by more than 100 basis points this year, rates have the potential to go higher. said.

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