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Today: 20.01.2018 - 15:10:22
   Canada Mortgage Hub Discussion Board -> Mortgage Rates Canada -> How will rising commodity prices affect Canada's inflation rate?
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retro_king

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How will rising commodity prices affect Canada's inflation rate?
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orpen

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If you mean fruit,fruit preparation and nuts,vegetables and vegetable preparations, then they won't have any effects on inflation because they are excluded from CPI. Last year the growth rate of CPI increased from 2.0% to 2.4%, mostly due to an increase in gas price, clothing and footwear. In general, an increase in commodity prices will stimulate inflation, more not less.
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nitro_hd

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It depends on how inflation is measured. Prices go up and down all the time for various reasons, but that does not mean that there is inflation in the economy. Not every price movement should be considered as inflation risk. Economists in Central Banks generally prefer a metric which captures the price increases that are 'sticky', that means once they are embedded in the economy they are difficult to get rid of (core inflation). This is an important criteria for the monetary policy to ensure price stability. The central bank cannot and should not change their monetary policy simply because of short term price fluctuations. As a result, central banks, including the Bank of Canada, tend to measure inflation by excluding the most volatile price components from the price indices. For example, the Bank of Canada uses CPI excluding the eight most volatile components (fruit, vegetables, gasoline, fuel oil, natural gas, mortgage interest, intercity transportation, and tobacco products) to measure inflation. However, increasing commodity prices, such as wheat, copper or sugar are still included and will have an impact on the inflation metric. The magnitude of the impact is difficult to estimate and depends on the size commodity component in the end product. Take for example the amount of silver used in a battery. Assume the price component of silver in the battery is 40% of the total price. An increase of 10% in the price of silver results in a 4% increase in the price of the battery.
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