November 21, 2008 / 12:19 PM / 9 years ago

Inflation eases sharply in October

4 Min Read

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

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.

"When you think about the implications that extend from this it really does suggest that the Canadian dollar is not the dominant influence on inflation now it is the economic slowdown," said Eric Lascelles, chief economist and rates strategist at TD Securities.

"And as such the Bank of Canada can feel quite comfortable in its plan to cut rates further," he said.

No Deflationary Risk

Governor Mark Carney, in an interview with Reuters on November 9, said he did not see a risk of deflationary pressures in Canada but cautioned there would be a period of "low inflation." The bank targets 2 percent inflation but tolerates a range of between 1 percent and 3 percent.

The inflation rate hit a five-year high in August of 3.5 percent but has been dropping ever since.

Carney told CNBC television this week that central banks ought to weigh the inflationary impact of deep interest rate cuts. But they must ultimately "do what's right," he said.

The Bank of Japan said on Thursday it was on watch for the risk of deflation as that country lapses into recession.

St. Louis Federal Reserve President James Bullar said that with U.S. rates already low, the U.S. central bank may have to rely on "quantitative easing" to ward off deflation, recalling large Bank of Japan liquidity injections during the 1990s to jump start the economy by flooding it with cash once rates reached zero.

In Canada, a 13.4 percent drop in gasoline prices was the main contributor to the decline in the consumer price index in October, which was the steepest since June 1959.

Prices also fell sharply for travelers' accommodation and natural gas. Property tax hikes partially offset those declines.

Inflation on a twelve-month basis was helped by the slower growth of prices at the pump and discounts on vehicles, clothing and computer equipment.

(Additional reporting by Toronto Treasury Desk, Scott Anderson)

Editing by Theodore d'Afflisio

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