October inflation in Canada -- not good news

Most Canadian economist were betting on unchanged core inflation numbers (stripping out the more volatile elements), but core inflation rose to 1.8% from 1.5% it was in September.  Including all CPI elements consumer prices rose 2.4% in the 12 months to October, the largest increase since October 2008. It follows a 1.9% increase in September. About half of the 0.5% increase can be attributed to higher gasoline prices (prices at the pump were 8.8% higher than a year earlier, following a 3.1% increase the previous month).

The seasonally adjusted CPI increase was even worse, consumer prices rose 0.7% during the month, the largest increase since 2006.  Could we be seeing stagflation in Canada? (Low growth and high inflation?). 

The distribution of price increase seems to be across the board, and seems to confirm the PPI increase of the summer, which are finally being passed through to consumers (on the bright side PPI have been tame of late – which could be good for future inflation).

It would appear that the strength of the Canadian economy has allowed producers to pass on to consumer their increase in production costs.

The implications of such increase will be to add pressure to the bank of Canada to maybe raise interest rates again, although this would feed to the Canadian consumer shelter costs (which have been rising at a rate of 2.8%).  Part of the BoC’s problem is that the economy appears to be weak, despite Ontario’s better than anticipated fiscal performance it remains that the 3^rd quarter of 2010 was difficult in terms of GDP growth, and worse is anticipated for the 4^th quarter. 

The Bank of Canada and the government of Canada may have to look at different tools to slow down inflation in Canada which will not throttle the economy.  The BoC will be under intense pressure not to raise interest rate since Federal elections are very likely in the new year.