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Today, StatsCan revealed that Canada's CPI rose by 1.3%. They are attributing it to lower energy prices, led by the fall in the gasoline index (down 12.6% since one year ago).

From my understanding, an increase in Canada's CPI means Canadian goods/services cost more CAD to purchase.

But if energy has become cheaper, why are things overall becoming more expensive to purchase?

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Canadian prices will tend to rise when energy prices fall because Canada tends to export oil and import other things. As a major oil exporter, a fall in the price of oil decreases the value of the Canadian currency— because foreigners have less need to purchase Canadian dollars with which to buy oil— causing other things to be more expensive to purchase (due to an increase in the prices of imported production inputs and finished goods).

Incidentally, this is why the Canadian Dollar is known as a commodity currency.

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  • $\begingroup$ I was following what you were saying until "casuing other things to be more expensive to purchase." I was lost there because: assuming I live in Canada -- even though the CAD/USD exchange rate decreases, I didn't understand how that would make local Canadian products cost more. Through @ramazan 's answer though, my understanding of "causing other things to be more expensive to purchase" became more clear. $\endgroup$ – Nixu Sep 22 '15 at 7:35
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I would like to provide a personal understanding of dismalscience's argument. So, to the best of my understanding, the mechanism with which the oil prices affect the CPI is through general equilibrium. When CAD loses value, to import things, we will need to sell more of the stuff we produce at home. This is going to imply a downward shift in domestic supply even if the total production is constant. If everything else is constant, this is going to raise the prices in terms of CAD.

Maybe this is something really obvious. I was just providing an understanding of my own about how the previous argument would apply.

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  • $\begingroup$ Regarding "to sell more of the stuff we produce at home," wouldn't that mean price of local goods have to decrease? Or rather, is there some action being taken to cause a downward shift (or a decrease) in domenstic supply? $\endgroup$ – Nixu Sep 22 '15 at 8:12
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    $\begingroup$ I was referring to selling more stuff we produce at home to foreign countries. There will be less supply for domestic market that would result in the aforementioned price change. Does this make it more clear? $\endgroup$ – ramazan Sep 22 '15 at 22:01
  • $\begingroup$ would Canadians be selling more stuff to foreign countries because Canadian goods appear cheaper to foreigners (as a result of the increase in the foreigners' purchasing power), which has increased the foreigners' demand? Or do Canadians have to sell more goods to acquire higher-than-normal nominal wealth in order to buy the same amount of foreign goods as they did before? $\endgroup$ – Nixu Sep 24 '15 at 15:18
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    $\begingroup$ I am looking at it from a budget balance perspective. There will for sure be substitution effects going on here. Most of them sure to explain some part of the price changes. However, again from the accounting perspective, you need to offer something to foreigners to buy their stuff. Even if the demand for those foreign stuff will be lower, I am assuming that the demand cannot be too elastic. This in turn will get us to your second explanation. Canadians otherwise would have no interest in consuming less of their production. $\endgroup$ – ramazan Sep 24 '15 at 22:22

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