Canada inflation drops, room for rate cuts seen

Fri Dec 19, 2008 11:10am EST
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By David Ljunggren

OTTAWA (Reuters) - Canada's annual inflation rate dropped in November due to lower gas prices but the closely watched core rate increased sharply, and some analysts said this could weaken the case for the Bank of Canada making more aggressive interest rate cuts to stimulate the economy.

Statistics Canada said on Friday the overall inflation rate dropped to 2.0 percent in November from 2.6 percent in October as lower gas prices offset an increase in food and shelter costs.

The rate was the lowest since the 1.7 percent recorded in April 2008. Market operators had forecast the November rate at 1.6 percent.

But the closely watched core rate -- which strips out the prices of gasoline and some food items -- jumped to 2.4 percent from 1.7 percent in October, reflecting smaller price decreases for purchasing and leasing passenger vehicles.

"This somewhat complicates the Bank of Canada's outlook, as by our calculations it seems as though core CPI could remain above the 2 percent level for several months to come," said Charmaine Buskas, senior economics strategist at TD Securities.

Most economists, however, believe desire to stimulate the economy in the current recession will trump concern about inflation threats when the Bank of Canada next sets rates.

"Inflation is, I think, the least of the concerns for central bankers. I think deflation is probably going to happen early in the new year in the United States," said Patricia Croft, chief economist, RBC Global Asset Management.

The central bank last week cut its benchmark interest rate to three-quarters of a percentage point to 1.5 percent, the lowest it has been since 1958.   Continued...

<p>A man gets into a truck outside a Petro Canada gas station in downtown Toronto in this file photo. REUTERS/Andrew Wallace</p>