Canada annual inflation cools in Dec as gasoline prices drop

OTTAWA (Reuters) - Canada’s annual inflation rate dipped as expected in December as gasoline prices cooled, but analysts said the Bank of Canada was likely to stay on a policy-tightening path with inflation still near the central bank’s 2 percent target.

FILE PHOTO: A woman walks through the doors at the Hudson's Bay Company (HBC) flagship department store in Toronto January 27, 2014. REUTERS/Mark Blinch/File Photo

The annual inflation rate was 1.9 percent last month, Statistics Canada said on Friday, down from 2.1 percent in November and matching economists’ forecasts.

Underlying inflation continued to perk up, with two out of three of the central bank’s measures of core inflation higher. CPI common, which the central bank says is the best gauge of the economy’s underperformance, increased to 1.6 percent from 1.5 percent.

Analysts said the report was unlikely to change much for the Bank of Canada, which raised interest rates last week for the third time in seven months as job growth and firmer inflation outweighed uncertainty over the NAFTA trade deal.

Still, Bank of Canada Governor Stephen Poloz said earlier this week that even he did not know what potential there may be for further interest rate hikes this year, reiterating that policymakers remained data dependent.

“For a data dependent central bank, this supports staying on a hike path,” said Derek Holt, vice president and head of capital markets economics at Scotiabank, pointing to the firmer core inflation.

Analysts in a Reuters poll predicted two more increases this year. [CA/POLL]

Rounding out the core inflation gauges, CPI median, which shows the median inflation rate across CPI components, held at 1.9 percent, while CPI trim, which excludes upside and downside outliers, rose to 1.9 percent.

The Canadian dollar saw little initial reaction to the data and was trading firmer against the greenback. [CAD/]

Markets odds of another hike in March were similarly little changed at 23 percent. Another hike is fully priced by May.

Food prices rose 2 percent from a year earlier as consumers paid more for food purchased at stores, particularly fresh vegetables.

The cost of gasoline moderated, with prices up 12.2 percent after the previous month’s annual 19.6 percent surge.

The household operations segment also weighed on inflation, down 0.3 percent due to a drop in the cost of telephone services as major telecom carriers offered temporary promotions.

Reporting by Leah Schnurr; Editing by Bernadette Baum