Canadian prices in biggest drop in 56 years

Wed Aug 19, 2009 2:44pm EDT
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By David Ljunggren

OTTAWA (Reuters) - Consumer prices in Canada fell at the steepest rate in 56 years in July due to a sharp decline in energy costs, but analysts said on Wednesday there was little risk of prolonged deflation.

Overall prices dropped 0.9 percent year-on-year in July, according to Statistics Canada, reflecting a 23.4 percent swoon in energy prices. The drop largely reflected a 28.3 percent decline in gasoline prices from July 2008, a trend that analysts said would soon reverse.

Economists had expected a 0.8 percent decline in overall prices in July from July 2008. The actual figure -- the steepest drop since the 1.4 percent fall recorded in July 1953 -- is far weaker than the Bank of Canada's target range of around 2 percent annual inflation.

"The year-ago comparison (on energy prices) has become much less favorable going forward, so we will see the headline rate of inflation move back to positive territory by the end of the year," said BMO Capital Markets senior economist Sal Guatieri.

Analysts, one of whom referred to "this yawner of an inflation report," said the annual overall inflation rate excluding energy rose 1.8 percent in the 12 months to July.

The core annual inflation rate -- closely watched by the Bank of Canada -- dropped to 1.8 percent from 1.9 percent in June. The rate excludes the cost of volatile components such as fruit, vegetables, natural gas, fuel oil and gasoline.

"There is likely a greater emphasis on the core reading than the headline, given the distortion created by the picture on petrol ... the narrowness of the story does not suggest that Canada is experiencing broad-based deflation," said HSBC Securities economist Stewart Hall.

"Nor is there a palpable concern for an inflationary spiral given the great amount of excess capacity sloshing around in an economy that is barely operating at three-quarter speed."   Continued...

<p>Shoppers walk out of a Calgary electronics store in Calgary, Alberta in this November 17, 2006 file photo. Canada's annual inflation rate hit a 56-year-low in July, when prices fell by 0.9 percent from a year earlier on sharply lower energy prices, Statistics Canada said on Wednesday. REUTERS/Todd Korol</p>