OTTAWA - The Canadian dollar hit a 33-year record high Friday, flying well past the $1.03 US mark on news that Canada's inflation rate had jumped to 2.5 per cent, stalling speculation that interest rates may be coming down.
The loonie opened at 103.42 cents US, up 0.72 of a cent from Thursday, and kept going, nearing 104 cents US at one point. It ended the day up 0.85 of a cent to 103.55 cents US - a level last seen in mid-1976.
"The market was almost looking for a trigger to drive the dollar above $1.03, and inflation was it," said BMO Nesbitt Burns economist Douglas Porter.
"The currency had been hanging around (below $1.03 US) for a prolonged time and momentum was building for another push higher, especially with oil prices at about $90 (US a barrel)."
Another factor in the loonie's latest flight was growing expectations that the U.S. Federal Reserve Board will cut interest rates next week, increasing the relative attractiveness of investments in Canada.
The September jump in the headline consumer price index, from 1.7 per cent in August, was almost all due to a 12.7 per cent year-over-year increase in gasoline prices, an effect exaggerated by a sharp decline in pump prices a year ago.
In comparison with August, gasoline prices were up 0.8 per cent, and excluding gasoline, prices rose 0.2 per cent during September.
"Canadians should not be concerned with this acceleration," said Toronto-Dominion Bank economist Ritu Sapra. "This wasn't much of a surprise and much of it was technical."
In fact, core inflation slid to the Bank of Canada's desired target of two per cent, down from 2.2 per cent in August and the first time it has been within the target range in over a year. The core index, which excludes highly fluctuating items such as fuel and fresh fruit, is one of the key indicators used by the central bank to set interest rate policy.
Yet core prices showed a larger than anticipated rise of 0.4 per cent from August, largely due to seasonal factors such as clothing and post-secondary tuition fees.
The inflation numbers give further ammunition to consumer complaints that Canadian retailers are not passing on their cost savings from the stronger dollar.
TD's Sapra said the true picture is murkier, however. The big rise in the all-items index was powered by a 3.6 per cent increase in the services sector, which is not affected by the currency. Inflation in goods was only 1.3 per cent in September.
Bank of Canada governor David Dodge said Thursday that consumers are getting some benefits from the higher dollar in terms of lower prices for fuel and food, but agreed that not all savings are being passed on.
In Washington, Finance Minister Jim Flaherty said Friday that his government wants to see Canadian retailers cut prices more quickly to reflect the benefits of a higher loonie, which pushes down the cost of goods imported from the United States.
"Prices should go down overall," Flaherty told reporters as he prepared to attend the annual meetings of the International Monetary Fund and World Bank this weekend.
"Now it won't all happen overnight. It will happen over time and different sectors of the retail economy have different realities in terms of pricing. But they should explain that and that helps consumers be more informed. And then, above all, consumers should shop and get the best prices."
Flaherty confirmed he will meet with officials from the Retail Council of Canada next week to encourage retailers to cut their prices.
Aside from gasoline prices, home ownership was a key inflation driver, as home replacement costs rose 4.8 per cent and mortgage interest costs accelerated by 6.4 per cent, the highest rate of growth since June 1991.
Food prices rose 1.9 per cent, but consumers got some relief from natural gas, whose cost fell 7.6 per cent; computer equipment, down 13.9 per cent; fresh vegetables, down 9.2 per cent; and video equipment, down 9.7 per cent.
Regionally, headline prices accelerated in every province except Alberta, where the inflation rate eased to 4.6 per cent from 4.7 per cent in August due to dropping natural gas prices.
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