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Inflation, interest rates, the Canadian Dollar – and energy

Last week’s report from Statistics Canada indicated that a slight rise in the Canadian inflation rate (from 2.0% to 2.1% over the last month) is due to several factors, but surprisingly, the cost of energy is not one of them.

 
With falling natural gas prices last month, which helped depress electricity prices as well, energy prices, which typically impact the consumer price index, were a non-factor. Energy costs rose at an overall rate of 1.1%, well below the 2.1% inflation rate. The largest contributors to the increase in inflation rates were transportation increases at 3.4%, gasoline at 3.3% and car insurance at 3.6%.

Why should growers be paying attention to these reports? The consumer price index and the rate of inflation in Canada is often a tell-tale sign of where interest rates are going to go. As inflation rises and pressure rises in particular sectors (such as new housing builds), the Bank of Canada will look to increase interest rates in order to keep inflation under control. The Bank of Canada targets a set rate of between 1 and 3% for inflation and anything outside of that range, or even nearing either of those end, will create action on its part.

Bank of Canada Governor Mark Carney has already suggested there will be interest rate increases by year-end. Should that occur, investment in the Canadian Dollar will increase, creating depressed prices in the energy sector, as investors switch from commodity investments to currency investments. Couple this with increasing supplies for both natural gas and crude oil, along with depressed demand from the industrial sector, and we are setting the stage for energy prices to stay at record lows through the summer and fall of 2012.

Energy management is becoming of increasing importance to financial institutions. Check out this month’s release by BMO and PROFIT magazine.

Lisa Brodeur is a Quality Assurance Supervisor at 360 Energy.