May 19, 2008 / 12:12 PM / 9 years ago

April inflation seen muted despite fuel hike

OTTAWA (Reuters) - High-flying gasoline prices have left Canadian consumers feeling like their living costs are spinning out of control, but an April inflation report will likely prove them wrong with rates staying at lows seen in March.

Statistics Canada will release the April inflation numbers on Wednesday at 7 a.m. (1000 GMT).

Markets expect the consumer price index to rise 0.5 percent in April for an annual inflation rate of 1.4 percent, according to the median forecast of 22 analysts in a Reuters poll.

They see the core inflation rate, which strips out gasoline and a handful of other volatile items, climbing 0.2 percent on the month but matching March's annual rate of 1.3 percent, which was the lowest since July 2005.

Inflation below its 2 percent target makes it easier for the Bank of Canada to follow through with a promise to cut interest rates again. Market players expect that to happen on June 10 with a quarter-point cut in the overnight rate to 2.75 percent.

"Not only are we not seeing an upward spike in inflation due to the supposed run-up in food prices and gasoline prices but inflation is actually going the other way," said Doug Porter, deputy chief economist at BMO Capital Markets.

Porter, who penned a note last week lashing out at what he called "a drumbeat of scare stories" in the media about rising prices and a faltering economy, said people fuming about prices at the pump would likely be skeptical about the good news story on inflation.

"It's probably going to lead to that old question: 'does the CPI lie?"'

Unlike most of the world, Canada is not suffering from food price inflation with the exception of a few items like bread. Most grocery prices have, in fact, declined due to stores' price wars and because the strong currency lowers the cost of imports priced in U.S. dollars.

New home prices, a significant portion of the CPI, are also turning lower as are prices for computers, electronic goods and even new cars, said Derek Holt, economist at Scotia Capital.

"In a forward-looking sense, we're expecting shelter costs to become disinflationary," Holt said. "We believe we are past the housing peak in Canada."

Holt sees food price inflation starting to kick in at the retail level in Canada one year from now.

In the meantime, the central bank may have to acknowledge consumer psychology and pay more attention to the overall inflation numbers -- which include gasoline and all foods -- and not just the core rate which usually guides its interest rate decisions.

"If everyone believes inflation is high or set to rise then that change in expectations can affect a lot of things," said Porter.

Editing by Renato Andrade

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