Income Strategy March 17, 2006 :

Stats Canada released the Consumer Price Index (CPI) data for February showing inflation in Canada declined to 2.2% from 2.8% in January. A decline of 6.8% in the price of gasoline for the month was the main reason for the drop in CPI. The price of gasoline has reversed in March and the February CPI may be a bit of an anomaly. Along with the decline in gasoline computer prices continue to fall, down 17.1% when compared to prices in February 2005.

Core inflation index which excludes the 8 most volatile sectors such as food and energy remained at 1.6% unchanged from January. The Bank of Canada follows the core inflation index closely due to the assumption that if core inflation is moving higher there are broad underlying pressures on inflation.

The reduction in inflation may allow the Bank of Canada to pause in its policy of increasing interest rates, allowing it time to see if the energy price rebound shows up as higher inflation for March and April.

Stats Canada also released capacity utilization data for the 4 th quarter of 2005 which showed a very slight increase to 86.3% verses the 86.1% for the 3 rd quarter of 2005. The increase in utilization in the energy sector was off set by declines in the manufacturing and forestry sectors. Capacity utilization is still at levels not seen in 5 years indicating that the Canadian economy is operating at or near full capacity which has been a major concern for the Bank of Canada and is the main reason for recent interest rate increases.

Inflation in the US was very little changed for February increasing by only 0.1% for the month for an annual rate of 2.6%. The small increase was due to a decline in energy of 1.2% and natural gas falling 4.5%. Core inflation was unchanged for February at 2.1% still well with in the 1-3% target range set by the Federal Reserve.

US Capacity utilization increased slightly to 81.2% from 80.8% in January coming in at a 5 year high. Industrial production increased by 0.7% in February all of the increase attributable to the increase in utility production due to colder winter weather after a very warm January. These increases indicate that the US economy is operating at a high level but is not able to move higher on sustainable production increases.

US housing starts fell 7.9% in February to 2.12 million units slightly ahead of the forecast of 2.03 million units. The majority of the decline came in the multifamily housing sector. Building permits also declined to 2.45 million verses the 2.216 million annual rate set in January. This decline is likely due to weather related issues but may be an indication of over supply in many regions, it will take more than one month of decline to establish if the red hot housing sector is showing signs of weakening.

The recent economic data appears to be indicating that the North American economy is showing signs of strain from higher interest rates and higher energy costs. This may be the beginning of a slow down that will see an end to rate hikes.