September 19, 2008 / 12:19 AM / 9 years ago

Consumer prices seen dropping in August

OTTAWA (Reuters) - Tumbling gasoline prices in August should trigger the first decline in Canadian consumer prices since January, but central bank watchers say inflationary fears have not eased enough to prompt an interest rate cut.

Prices at the pump fell by about 5 percent in August, according to the latest estimates. That will likely result in a 0.2 percent drop in the consumer price index in August, compared with July, according to the average forecast of analysts surveyed by Reuters.

However, the annual inflation rate will continue to rise further above the central bank’s 2 percent target to 3.5 percent, up from 3.4 percent in July, they said.

Unlike the United States, where inflation appears poised to melt away amid a financial crisis and economic slowdown, Canada faces offsetting factors. The Canadian dollar has weakened against the U.S. dollar in recent months, meaning imported goods are not as cheap as they were when the two currencies were near parity.

“Despite this monthly decline, the year-over-year inflation rate is likely to edge higher due to higher prices for imports and import competing goods,” said John Clinkard, chief Canadian economist at Deutsche Bank.

Doug Porter, deputy chief economist at BMO Capital Markets, said there was also a big drop in energy prices a year ago. “So the pullback in gasoline prices in August will help the monthly move but it’s going to be a bit of a challenge for the headline inflation to actually drop from a year ago.”

The year-on-year inflation rate has catapulted from a low of 1.4 percent in March due to the commodity price boom.

The Bank of Canada expects past energy-price increases to push inflation higher in coming months, but Deputy Governor John Murray said on Thursday the inflation spike between now and early 2009 “will be lower than projected in July.”

Murray stressed that core inflation has stayed below the bank’s 2 percent target. The bank’s research shows core inflation is the most reliable gauge of underlying price trends as it strips out short-term fluctuations in volatile items such as gasoline.

Analysts on average forecast a monthly rise of 0.1 percent in core inflation in August and a 1.6 percent yearly rate.

But it will take more than that to push the Bank of Canada into lowering borrowing costs.

“I think they’re extremely uncomfortable at this point, whether it’s the financial turmoil or the fact their headline (inflation) rate is above target,” Porter said.

“I still think the most likely course ... is that the bank stays on hold.”

Reporting by Louise Egan; Editing by Peter Galloway

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