February inflation eases on lower car prices

Tue Mar 18, 2008 9:17am EDT
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By Louise Egan

OTTAWA (Reuters) - Canada's annual inflation rate eased in February, leaving the Bank of Canada in a comfortable spot if it wants to follow the U.S. Federal Reserve and slash interest rates aggressively amid growing market turmoil.

Consumer prices rose 1.8 percent in February compared with a year earlier, down from 2.2 percent in January, as a smaller rise in gasoline prices and a robust Canadian dollar led to lower prices on some goods, Statistics Canada said on Tuesday.

The surprise in the report was that core inflation, which excludes volatile items like gasoline and guides monetary policy, quickened slightly to 1.5 percent in February from 1.4 percent in January, though it remained well within the central bank's comfort zone.

This was the first rise in eight months, driven by a sharp 4.8 percent rise in the cost of house repairs.

"For the Bank of Canada, what this suggests is the free ride of ever declining core inflation may be coming to an end," said Doug Porter, deputy chief economist at BMO Capital Markets.

"But I would still say that Canada has got much less of an inflation problem than basically everywhere else in the world."

The central bank is widely expected to cut its overnight interest rate at its next meeting on April 22, after having trimmed it by a full percentage point since December to 3.5 percent.

With inflation not a problem, economists expect the upcoming rate decision to be driven by concerns of financial market stability.   Continued...