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

Expect more rate hikes, as fuel prices are the exception to a still-rising cost of living

Three Tesla electric vehicles drive past a sign displaying the price of gas in Vancouver on May 14, as it reached a new high of $2.28 a litre. Despite a drop in inflation for July, for Tesla drivers and others who don't use gas, prices are still climbing. (Darryl Dyck/The Canadian Press)

Three Tesla electric vehicles drive past a sign displaying the price of gas in Vancouver on May 14, as it reached a new high of $2.28 a litre. Despite a drop in inflation for July, for Tesla drivers and others who don't use gas, prices are still climbing.

Photo:  (Darryl Dyck/The Canadian Press)

RCI

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.

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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 (new window) 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 (new window)," 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.

 There is a danger that political outrage over rising prices could be replaced with new outrage over rising interest rates

"There is a danger that political outrage over rising prices could be replaced with new outrage over rising interest rates"

Photo:  CBC

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 (new window), 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 (new window) 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:

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 (new window), 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.

Don Pittis (new window) · CBC News ·

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