The HST caused some prices to rise, but is not inflationary

The Bank of Canada has, as its stated policy, an inflation target of 2% annually, plus or minus 1%. Today’s announcement that year over year changes in the Consumer Price Index (CPI) was 2.4% might lead to speculation that the Bank will act to reduce inflationary pressure. Details are in a Globe and Mail article (click here for article)

The main culprits for the increase in prices are energy prices, automobile insurance premiums in Ontario, postal rates and the introduction of the HST in Ontario and BC. Of these, only energy prices are likely inflationary, and those prices are always volatile. The reason that the others are not inflationary has to do with how inflation is calculated and the definition of inflation.

Inflation is a sustained increase in prices and is measured as the percentage change in the consumer price index. One time increases in price cause the CPI to rise but, because they are not sustained increases, they are not inflationary. The automobile premiums have risen due to the poor performance of the stock markets. Premiums have to increase as a result. This problem is not likely to continue, therefore it is not inflationary. The HST has caused the price of those goods not previously subject to the provincial sales tax (PST) to increase. Again, this is not inflationary.

Mark Carney, Governor of the Bank of Canada, will keep careful watch over the CPI and the inflation rate. When the inflation rate rises as a result of sustained increases in the demand for goods and services, expect the interest rates to rise. Until then, nothing much should happen.