OTTAWA (Reuters) - Canadian consumer prices had the second steepest fall in more than 50 years in August, suggesting inflation will not trouble policymakers as they plot how to undo expansionary measures taken during the recession.
Statistics Canada also said on Thursday that the composite leading indicator rose by a sharper-than-expected 1.1 percent in August, the latest sign the economy is pulling out of deep recession.
Statscan said an increase of more than 1 percent usually only happens in the early stages of economic recovery from a downturn.
Consumer prices overall fell by 0.8 percent in August from a year earlier, the second-largest 12-month drop since 1953, Statscan said. In July, consumer prices slid 0.9 percent at an annual rate, which was the sharpest drop since 1953 when the CPI fell 1.4 percent.
Prices in August were dragged down by falling gasoline prices. On a monthly basis, prices were little changed from July.
Core inflation, considered a better gauge of underlying prices because it excludes volatile items such as gasoline and some foods, met expectations by inching up 0.1 percent on the month and 1.6 percent year-on-year.
The period of falling prices, or deflation, is widely expected to be short-lived, with prices rebounding later this year as the economy expands. Still, the Bank of Canada sees both core and overall inflation staying below its 2 percent target until mid-2011.
"We haven't seen the end to the downsides on core consumer prices going forward," said Derek Holt, vice-president at Scotia Capital Economics.
"If we are right and the Canadian dollar goes to parity (with the U.S. dollar) then inflation is going to be parked as a side issue for a good couple of years," he said.
The leading indicator index was pulled higher mainly by housing, new manufacturing orders and consumer demand on durable goods such as autos.
"Overall, this is a great report and underpins expectations that the Canadian economy is developing traction," said Charmaine Buskas, senior economics strategist at TD Securities.
The Canadian dollar softened to C$1.0647, or 93.92 U.S. cents, from C$1.0625, or 94.12 U.S. cents, from its level of before the data. Overnight, it hit a high of C$1.0606, or 94.29 U.S. cents, its strongest level in almost a year.
Canadian government bond and T-bill prices were little changed.
The inflation numbers mean the Bank of Canada can comfortably hold interest rates at a record low of 0.25 percent until the end of June 2010, as promised, without fear of fueling inflation.
"There's nothing here to send the Bank of Canada sharply off its track. I don't think there's anything here to send markets off their track either," said Eric Lascelles, chief economics and rates strategist at TD Securities.
Governor Mark Carney, faced with the impossibility of lowering rates further, has shown reluctance to engage in unorthodox policies taken by some other central banks, such as printing money to buy bonds in the open market.
But he has hinted he could resort to such action, especially if the rising Canadian dollar threatens to derail the economic recovery process.
Energy prices in August fell 19.1 percent from a year earlier but climbed 2.3 percent in August from July.
Additional reporting by Jennifer Kwan and Scott Anderson in Toronto; Editing by Peter Galloway