Higher energy costs that have been squeezing the profit margins of manufacturers for months could be closer to being passed on to consumers of all sorts of goods.
Soaring oil prices in March fueled the biggest one-month gain in almost two years for a Statistics Canada index that tracks the cost of raw materials used in the production process, helping to spur a second consecutive spike in the prices that factories charge retailers and wholesalers for products.
The 5.7% gain in raw-material costs was due almost entirely to a 16% monthly increase for crude oil, the federal agency said. As a result, for the second month in a row, a related index of prices charged by producers rose 0.9%, marking the fastest pace since mid-2008, when the spreading financial crisis interrupted an even sharper surge in oil prices.
The report suggests manufacturers’ capacity to absorb higher costs without passing them onto their customers is starting to erode, which means more of those customers may soon need to raise their own prices to cover the added costs. The question is whether higher commodity prices will last long enough for that "pass-through" effect to take such a strong hold that broader inflation quickens beyond the Bank of Canada’s comfort level.
The gauge of producer prices actually would have slipped 0.1% had it not been boosted by factories that produce petroleum and coal products.
Still, some economists argue that central bankers like Bank of Canada Governor Mark Carney and U.S. Federal Reserve Board chairman Ben Bernanke could have less time than they may realize before inflationary pressures build throughout the economy and become harder to control.
Higher energy and food prices in March caused annual consumer price inflation to spike to 3.3%, the fastest pace in 2½ years and well beyond the Bank of Canada’s 2% target. But it remains an open question whether commodity-fuelled price gains will be long-lasting enough to put upward pressure on the biggest drivers of inflation, such as wages.
The central bank’s preferred measure of annual price gains, which strips out volatile items like energy and fresh food, is at 1.7% -- higher than policy makers thought it would be at this point in the recovery, but still manageable.
Also, the economy unexpectedly shrank in February for the first time in five months, Statistics Canada reported Friday, suggesting that the so-called output gap -- or slack left by the recession -- will take longer than expected to chew up. That, plus an unemployment rate still well above 7%, suggests there’s little scope for retailers to raise prices by very much even as they watch their costs rise.
Statistics Canada reported early last month that in March, the year-over-year pace of average hourly wage growth accelerated to 2.7% from 2.5% in February.
This Friday, the agency will release employment data for April, which will give a better sense of whether wage pressures are rising.
