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Canada stands alone as it dodges inflation bullet

OTTAWA The pace of inflation in Canada is among the lowest of industrialized countries, second only to Japan, according to a comparison on consumer prices in March by the Organization of Economic Co-operation and Development.

The figures show that while many developed countries are wrestling with slowing economies and rising prices, Canada has the luxury of dealing only with a slowing economy, at least for now.

Consumer prices for the 30 countries included in the OECD rose 3.5 per cent in March compared to a year earlier, compared with a 3.4 per cent pace measured in February, the OECD said.

Energy prices in March were 13.3 per cent higher than a year ago, while food prices were 5.1 per cent higher. Excluding food and energy, core inflation was 2.1 per cent in March, compared to a 2.0 per cent pace of core inflation in February.

The inflation picture in Canada, however, is far more benign.

Total inflation in March was 1.4 per cent compared to a year ago, with food prices actually dropping 0.3 per cent, and energy prices rising just 5.4 per cent. Core inflation was 1.0 per cent.

For both total and core inflation, Canada was the second lowest of the entire OECD, which groups the world's most industrialized countries. Japan, which has struggled for years to fend off deflation, showed total inflation of 1.2 per cent in March, and core inflation of 0.2 per cent.

The highest inflation rates were seen in Iceland and Turkey, both of which are dealing with current account deficits and financial turmoil.

Canada's remarkably low inflation is due mainly to the rise of the Canadian dollar over the past year. Imports are cheaper for Canadian buyers, pushing down domestic prices for goods especially cars and food, especially fruits and vegetables.

The appreciation of the currency has also muted the rise in energy and gasoline prices. Competition among grocery stores has also kept food prices low at a time when many countries are dealing with unrest and export controls because of soaring food prices. Even in the European Union, food prices were 6.9 per cent higher in March compared to a year ago, the OECD figures show.

Some economists in Canada warn that benign inflation can't persist here, since the effects of a rising currency and grocery price wars will wear off, and won't continually keep prices flat. Eventually, they say, Canada will become vulnerable to the inflationary pressure being felt in the rest of the world.

But others argue that the higher global inflation will cool off soon as the world economy slows.

The Bank of Canada in its latest quarterly outlook said that once all the extraordinary factors are set aside, total inflation will average about 2 per cent in 2008. Core inflation will likely remain below the central bank's target of 2 per cent, until 2010, the bank said.

The Globe and Mail