October 17, 2014 / 12:37 PM / 3 years ago

UPDATE 3-Canada inflation hits target but how much is temporary?

3 Min Read

(Adds meat impact, paragraphs 10-13)

By Randall Palmer

OTTAWA, Oct 17 (Reuters) - Canadian inflation settled exactly at the Bank of Canada's target of 2.0 percent in September, with the core rate staying at 2.1 percent, according to Statistics Canada data released on Friday.

Bank of Canada Governor Stephen Poloz has said some recent price increases were temporary and so should be ignored, suggesting a lower underlying rate, but for now inflation is at the midpoint of the target range of 1 to 3 percent.

"Mr. Poloz has been pretty consistent about brushing aside the recent upswing in inflation, and I don't think this will change his tune too much," said BMO Capital Markets chief economist Doug Porter.

"But I do think it is notable that core inflation is sticking above two percent."

Month on month, consumer prices rose 0.1 percent in September and core prices, which strip out volatile items such as natural gas, increased 0.2 percent.

The annual and monthly rates for total and core inflation came in exactly as forecast in a Reuters survey of analysts.

Shelter costs were 2.7 percent higher in the year to September, with natural gas 16.2 percent more expensive.

Food prices were also 2.7 percent higher, led by an 11.5 percent jump in meat. Costlier meat is an example Poloz cites as being due to temporary factors rather than to a tightening of the economy, and therefore monetary policy should not adjust to it.

In its July Monetary Policy Report, the Bank of Canada predicted core inflation of only 1.7 percent for the third quarter and 1.8 percent for the fourth. It saw total inflation of 2.0 percent for the third and 2.2 percent for the fourth. The next MPR comes out on Wednesday.

BMO's Porter said meat prices alone were responsible for boosting core inflation by 0.3 percentage point; without it core inflation would be at 1.8 percent.

Chicago lean hog futures hit an all-time high this summer because of losses to Porcine epidemic diarrhea virus (PEDv). They have since eased as U.S. farmers rapidly rebuilt herds but they remain historically high.

The disease has reached No. 3 pork exporter Canada, where a plant worker shortage and government caps have constrained pig and pork supplies.

Beef prices have been boosted by a drought in Texas. World beef markets will remain tight through 2014 due to reduced supply from key export markets, Rabobank said this month.

Economists had been looking for indications that Poloz might abandon the officially neutral stance either in his Oct. 22 rate statement or on Dec. 3 but the unsettled markets have brought new uncertainty to the outlook.

Poloz said last week he did not expect to give forward guidance as to when interest rates would rise, even if a rate hike became imminent, because "the market will know." (Additional reporting by Leah Schnurr, Euan Rocha and Andrea Hopkins in Toronto and Rod Nickel in Winnipeg; Editing by Chizu Nomiyama, Lisa Von Ahn and James Dalgleish)

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