Tame Canada inflation sets stage for central bank shift

Fri Oct 19, 2012 11:52am EDT
Email This Article |
Share This Article
  • Facebook
  • LinkedIn
  • Twitter
| Print This Article | Single Page
[-] Text [+]

By Louise Egan

OTTAWA (Reuters) - Canadian inflation remained tame in September at 1.2 percent, unchanged from August and provided little justification for the Bank of Canada to maintain a hawkish bias when it sets interest rates next Tuesday.

Core inflation, which excludes gasoline and other items so that underlying price pressures can be revealed, was at its lowest level in more than a year at 1.3 percent, down from 1.6 percent in August, according to a Statistics Canada report on Friday.

With inflation at, or below, the central bank's 2 percent target since March, price pressures are the least of Canadian policymakers' worries as economic growth slows and personal debt soars.

"(The data) shows (an) almost complete absence of inflation pressure in Canada's economy. Wage growth is moderate, the strong Canadian dollar is dampening import costs, and retailers are challenged by cross-border shopping," said Sal Guatieri, senior economist at BMO Capital Markets.

Food prices fell at the fastest rate since 1991 in September from August, and showed a more modest 12-month gain than in August. Car price increases also slowed in the year, offsetting sharp rises in gasoline and electricity costs.

The Bank of Canada has been alone among major Western central banks in telegraphing its desire to raise rates rather than lower them, and has done so since April. But a majority of analysts in a Reuters poll this week predicted it would soften its tone somewhat next week.

"I don't think they'd think this move in the CPI is chronic, i.e. that we are in danger of going through 1 percent. But I think they will use it as a reason to move back to neutral," said Mark Chandler, analyst at RBC Capital Markets.

The bank is seen holding its overnight target at 1.0 percent on Tuesday and it will likely revise down the growth and inflation projections in its economic outlook on Wednesday.   Continued...