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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 way too high,” said Cameron Benn, as he filled up his truck Tuesday, paying $1.66 per litre. “The fact that this sounds cheap is just insane.”

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 still rising, year on year

Living in a big country with long driving distances, Canadians use a lot of gas. 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. In fact, for those who don’t use gas, inflation is higher than ever. And for those on a fixed income, or those whose incomes have not kept up with inflation this year, things are 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.

That leads to two problems. 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 keeps one eye on the headline inflation number that we normally report in the media, central banks prefer to use core because it offers a better long-term indication of both inflation and inflationary expectations.

It is not at all clear that the Bank of Canada’s recent rate hikes were responsible for bringing gas prices down. 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.

WATCH | Canada’s inflation rate drops to 7.6% in July:

gas may be cheaper but otherwise prices are still on the rise

Canada’s inflation rate drops to 7.6% in July, first decrease in a year

9 hours ago

Duration 2:02

Canada’s inflation rate is down for the first time in more than a year, dropping to 7.6 per cent in July compared to 8.1 per cent in June. Yet some Canadians say they’re feeling little relief.

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 basis points is three-quarters of a percentage point.)

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.

As other economists have 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. The other is that as headline inflation rises, everyone expects it to rise some more, leading to higher inflationary expectations in terms of prices and wage demands.

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

“Fluctuations in the price of gas disproportionately influence consumer perceptions of inflation,” said Van Mulligen. “The flurry of optimistic headlines that are likely to follow [Tuesday’s] release may also help to soothe the anxious animal spirits that have disturbed Canadian consumers this year.”

gas may be cheaper but otherwise prices are still on the rise 1
Falling gas prices might put a smile on your face and revive what the economist John Maynard Keynes called ‘animal spirits,’ or emotions that affect consumer confidence. (Colin Braley/Reuters)

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.

Even after successive hikes, real interest rates remain exceptionally low after taking inflation into account.

While 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.

“We’re not likely to see any more 100-basis point boosts to interest rates this year, but rates certainly have further to climb,” he said.

Follow Don on Twitter @don_pittis

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