December inflation a central banker's "dream"

Fri Jan 20, 2012 10:22am EST
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By Louise Egan

OTTAWA (Reuters) - Canada's annual inflation rate eased more than expected in December to levels closer to the Bank of Canada's 2 percent target, making it easier for the central bank to keep rates low or even cut them if the European debt crisis worsens.

Slower growth in gasoline prices and lower vehicle costs helped push down the consumer price index by 0.6 percent in the month, Statistics Canada said on Friday.

In a separate release, Statscan said wholesale trade fell 0.4 percent in November, unexpectedly ending a six-month string of gains and adding to evidence of an slowdown in economic growth in the final quarter of last year.

December inflation slowed to a year-on-year 2.3 percent, down from 2.9 percent in November.

The core rate, which excludes volatile items like gasoline and gives a more accurate picture of underlying price pressures, slipped 0.5 percent. The annual core rate fell to 1.9 percent from 2.1 percent.

"This is the inflation report that the Bank of Canada had been dreaming about," said Scotia Capital economist Derek Holt in a note to clients.

The central bank held its key interest rate at an ultra-low 1 percent on Tuesday for the 16th straight month and cited the European debt crisis as the biggest threat to the economy. It gave no indication it planned to move rates either up or down.

The bank also raised its inflation outlook slightly, raising fears that it might be more reluctant to ease monetary policy. But Friday's softer inflation data eases those fears.   Continued...