May 2, 2008 / 3:23 PM / in 10 years

Canada nowhere near stagflation, Carney says

OTTAWA (Reuters) - Canada’s low food inflation is “almost unique” in the world and ensures it will avoid the dreaded “stagflation” fears plaguing other industrialized countries, Bank of Canada Governor Mark Carney said on Thursday.

<p>Bank of Canada Governor Mark Carney waits to testify before the Commons finance committee on Parliament Hill in Ottawa April 30, 2008. REUTERS/Chris Wattie</p>

Reports from the United States, Europe and Japan all suggest weakened economic growth and high inflation, a combination known as stagflation.

Canada, to the contrary, has seen lower than expected inflation although its economy is softening due to heavy reliance on the slowing U.S. economy for trade.

“Not at all. Not at all,” said Carney when asked by a senator if Canada faced a risk of stagflation.

“Stagflation is, of course, a slowing economy and sharply rising inflation and the situation we have is, we have inflation below our target and reasons to expect a continuation of that, and policy is adjusted accordingly,” he told the senate banking committee.

Canada’s food inflation rate is about 2.5 percent and the overall inflation rate will stay below the bank’s 2 percent target until 2010, Carney said.

“The situation in Canada right now for food inflation is almost unique in the world,” he added.

Why so low? Carney pointed to excess supply of meat in the North American market, the impact of the Canadian dollar’s appreciation on import prices and heightened competition in the retail sector with the arrival of “big box” stores.

The bank judges, for now, that some of the price-cutting that resulted from the currency’s rise last year may not be sustained.

When it comes to the currency, Carney offered little comment on whether its strength was justified by economic fundamentals, saying only that strong terms of trade were “appropriately reflected” in its value.

He did hint that he agreed with a report by the Bank of England on Thursday that suggested some of the official estimates for global losses related to U.S. subprime-related securities might be “higher than the reality” due to differences over methods for calculating loss.

In March, at the worst of the credit turmoil, the International Monetary Fund put a $1 trillion estimate on the expected losses, but it was referring to all losses, including things like commercial real estate, leveraged loans and credit cards, not just the U.S. subprime mortgage crisis.

Editing by Renato Andrade

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