December inflation rate rises to 1.6 %

Wed, January 24, 2007

By JOHN WARD, CP


OTTAWA -- The latest economic data offered mixed signals yesterday, with December inflation, November retail sales and the leading indicator all slightly higher.

Canada's annual inflation rate crept up to 1.6 per cent in December, from 1.4 per cent in November, pushed again by higher "home replacement" costs, especially in Alberta.

For 2006 as a whole, the rate was two per cent.

Statistics Canada also reported its leading indicator, a predictor of economic activity, grew by 0.3 per cent in December after a 0.5 per cent surge in November.

And retail sales rose a disappointing 0.2 per cent in November after declining for two months.

The increase was driven by higher gasoline prices and higher auto sales, but adjusted for price changes, total retail sales were down 0.2 per cent in November after falling 0.6 per cent in October.

Analysts worried this set the stage for a lacklustre Christmas season, for which figures are due next month.

"Retail sales for December account for a very large part of retailers' overall sales for the year and we've had a bit of a disappointment leading into the Christmas season, so I think they'll be actually quite key in seeing if we get a good bounce back or not," said Carolyn Kwan, an economist at Scotiabank.

She said the increased leading indicator was "somewhat good news."

Statistics Canada said the rise in the indicator continued to be driven by consumer spending and financial markets, while sluggish U.S. markets restrained growth.

The main driver of inflation in December was a second consecutive 8.2 per cent monthly increase in homeowners' replacement cost -- representing the worn-out structural portion of housing. This index has been rising by better than eight per cent a month since last August.

Core inflation, used by the Bank of Canada to monitor its inflation-control target, rose by two per cent in December, compared with 2.2 per cent the previous month.

The core number ignores volatile energy and food costs and doesn't count changes to indirect taxes, such as last summer's GST cut.

The central bank had forecast core inflation wouldn't return to two per cent until later this year.

Kwan suggested this means there may be less inflationary pressure in the economy than the bank expected.