December 19, 2008 / 12:22 PM / in 9 years

Canada inflation drops, room for rate cuts seen

OTTAWA (Reuters) - Canada’s annual inflation rate dropped in November due to lower gas prices but the closely watched core rate increased sharply, and some analysts said this could weaken the case for the Bank of Canada making more aggressive interest rate cuts to stimulate the economy.

<p>A man gets into a truck outside a Petro Canada gas station in downtown Toronto in this file photo. REUTERS/Andrew Wallace</p>

Statistics Canada said on Friday the overall inflation rate dropped to 2.0 percent in November from 2.6 percent in October as lower gas prices offset an increase in food and shelter costs.

The rate was the lowest since the 1.7 percent recorded in April 2008. Market operators had forecast the November rate at 1.6 percent.

But the closely watched core rate -- which strips out the prices of gasoline and some food items -- jumped to 2.4 percent from 1.7 percent in October, reflecting smaller price decreases for purchasing and leasing passenger vehicles.

“This somewhat complicates the Bank of Canada’s outlook, as by our calculations it seems as though core CPI could remain above the 2 percent level for several months to come,” said Charmaine Buskas, senior economics strategist at TD Securities.

Most economists, however, believe desire to stimulate the economy in the current recession will trump concern about inflation threats when the Bank of Canada next sets rates.

“Inflation is, I think, the least of the concerns for central bankers. I think deflation is probably going to happen early in the new year in the United States,” said Patricia Croft, chief economist, RBC Global Asset Management.

The central bank last week cut its benchmark interest rate to three-quarters of a percentage point to 1.5 percent, the lowest it has been since 1958.

But it also forecast that core inflation -- the measure of prices used to guide monetary policy -- would fall further than initially forecast.

“It is a bit of a shock how much core inflation went up. I don’t think it’s sustainable, but it does drive home the point that deflation is not a big risk for Canada any time soon,” said Doug Porter, deputy chief economist at BMO Capital Markets.

The Canadian dollar slipped slightly after the release of the inflation data and at 8:10 a.m. was at C$1.2269, or 81.51 U.S. cents, from C$1.2244, or 81.67 U.S. cents, before the data was released.

“In another environment this (the core) would have been real news. But with the current environment of downside spreads to global growth and continued concerns on deflation, (it) is probably not going to grab a lot of headlines,” said Craig Wright, chief economist at Royal Bank of Canada.

Statistics Canada said the drop in the overall inflation rate was largely due to falling gasoline prices, which were 14.4 percent lower than in November 2007 and 21.4 percent lower than in October 2008.

The drop in gas prices masked a jump in food prices, which rose 7.4 percent from November 2007 on higher commodity prices and the lower Canadian dollar. It was the ninth consecutive month that food prices have increased.

With additional reporting by Scott Anderson, John McCrank and Jennifer Kwan in Toronto, Editing by Peter Galloway

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