Canada annual inflation cools in November, keeping rate cut odds alive

OTTAWA (Reuters) - Canada’s annual inflation rate cooled in November, suggesting the Bank of Canada will maintain its cautious stance and keeping alive the possibility of another rate cut as new measures of underlying inflation also fell short of the central bank’s target.

Shoppers stroll through the 5.3 million square foot (492,000 square metre) West Edmonton Mall in Edmonton, Alberta February 26, 2015. REUTERS/Dan Riedlhuber

Separate data from Statistics Canada on Thursday showed October retail sales rose more than expected, boding well for economic growth at the start of the fourth quarter.

But economists were focused on the inflation figures that showed the annual rate decreased to 1.2 percent from October’s 1.5 percent, short of forecasts for 1.4 percent.

Three new measures of core inflation were slightly more robust but still below the bank’s 2 percent target. Economists said the possibility of another rate cut could not be ruled out, although most expect the bank to stay on the sidelines until 2018.

That is in contrast to the U.S. Federal Reserve, which raised rates earlier this month. [CA/POLL]

“It will just reinforce the Bank (of Canada’s) message that they have zero interest in following the Fed higher,” said Doug Porter, chief economist at BMO Capital Markets.

“In fact, I think it will keep a flicker of doubt out there that the bank could even consider cutting rates, in an extreme situation.”

The Canadian dollar weakened against the greenback following the data. [CAD/]

Food prices fell 0.7 percent from a year ago as consumers paid less for meat and fresh fruit and vegetables. A decrease in prices for clothing and gasoline also contributed to slower inflation.

Among the core measures the bank established when it renewed its inflation target in October, CPI median was the closest to target, up 1.9 percent compared to the year before. The measure shows the median inflation rate across CPI components.

CPI trim, which excludes upside and downside outliers, was at 1.6 percent.

CPI common, which measures common price changes across categories in the CPI basket, was the coolest at 1.3 percent. The bank has said the common gauge has the best correlation to the output gap.

Economists have said that using three core measures instead of one could make it difficult to determine what the bank will react to.

Retail sales rose 1.1 percent in October as consumers bought more at general stores, although they paid more for gasoline.

The report suggested the economy may have started the fourth quarter on better footing, though growth is expected to slow compared to the third quarter.

Additional reporting by Allison Martell in Toronto; Editing by Bill Trott