Inflation softer than expected in December

Tue Jan 25, 2011 11:51am EST
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By Leah Schnurr

OTTAWA (Reuters) - Canada's annual inflation rate rose less than expected in December despite pressure from rising energy prices, underscoring the view that the central bank will hold interest rates steady in the near term.

A rise in gasoline prices pushed Canada's annual headline inflation rate up to 2.4 percent after a 2 percent rise the month before, Statistics Canada said on Tuesday. December's consumer price index was unchanged on a month-on-month basis.

The increase on a annual basis was slightly below the market forecast of 2.5 percent. Traders reacted by pushing the Canadian dollar to a session low and driving money market and bond yields lower.

Currencies usually weaken on the prospect of soft interest rates as higher rates in other countries attract capital flows.

"It basically argues that inflation isn't getting out of hand, we don't have broad based price pressures ... and that implies the Bank of Canada doesn't have to be in a rush to raise interest rates," said Craig Alexander, chief economist at Toronto-Dominion Bank.

December's core inflation rate -- which strips out gasoline and other volatile prices and is watched closely by the Bank of Canada -- showed prices retreated 0.3 percent from a month earlier. Core prices edged up to 1.5 percent on the year compared with a 1.4 percent rise in November.

"The key point here is that the big improvement, or moderation in core inflation that we saw in November, largely stuck in December. So we are starting 2011 with quite muted inflation trends," said Doug Porter, deputy chief economist at BMO Capital Markets.

"It looks like the Bank of Canada's call for 1.4 percent average core inflation read in the first quarter is quite doable."   Continued...