Inflation eases sharply in October

Fri Nov 21, 2008 9:01am EST
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By Louise Egan

OTTAWA (Reuters) - Consumer prices registered their sharpest decline in nearly 50 years in October, dropping 1 percent from September as gasoline prices plummeted from recent high levels, Statistics Canada said on Friday.

As a result, the annual inflation rate in October eased more than expected to 2.6 percent from 3.4 percent in September. Analysts in a Reuters poll had forecast a rate of 3.1 percent.

The core rate, considered the best gauge of underlying price trends because it excludes volatile items like gasoline, held steady at 1.7 percent.

Coming at a time when global central bankers have raised concerns about possible deflation, this report may give the Bank of Canada a little more leeway to cut rates further. The central bank has already estimated inflation will fall below 1 percent next year as the global economy lapses into recession.

"From a monetary perspective, I think that gives even extra room for the Bank of Canada to intervene at the next policy meeting and stimulate the economy, because clearly a lot more weakness is coming from the U.S. and a lot of downside pressures are now evident on the inflation side," said Anna Piretti, senior economist, BNP PARIBAS in New York.

The Canadian dollar strengthened slightly after the data to C$1.2756 to the U.S. dollar, or 78.39 U.S. cents, from C$1.2800, or 78.13 U.S. cents previously. Bond prices were lower across the curve.

The Bank of Canada has telegraphed its inclination to cut interest rates further and is widely expected to make its move on December 9. Analysts have been split on whether it will cut by 25 basis points or 50 basis points at that time.

Canada's central bank has already reduced its key overnight lending rate by 225 basis points since December 2007 to 2.25 percent. It participated in the globally-coordinated central bank rate cuts on October 8.   Continued...

<p>A man pumps gas into his truck at a Petro-Canada gas station in Toronto January 31, 2008. REUTERS/Mark Blinch</p>