Canadian Core Inflation Slowest Since December 2005
Canada's annual inflation rate minus volatile items such as gasoline was the lowest in two years in December, giving central bankers more room to cut interest rates.
Core prices rose 1.5 percent in December, slowing for the sixth straight month and below the central bank's target for a third month, from 1.6 percent in November. Economists surveyed by Bloomberg forecast the rate would accelerate to 1.7 percent, the median of 21 estimates. The all-items index slowed to 2.4 percent from 2.5 in November, as economists expected.
Today's report shows that core inflation is slowing even earlier than Bank of Canada policy makers predicted yesterday, two days after cutting their benchmark rate for a second month. Central bankers said prices would drop throughout 2008, and that they would likely cut rates again to shield the economy from a possible U.S. recession.
“This report gives the Bank of Canada maximum flexibility to respond to growth risks over the coming months, and is one reason why we see the bank cutting rates by'' 50 basis points on March 4, Meny Grauman, an economist with CIBC World Markets in Toronto, said in a note to clients. The numbers also “put downward pressure on the Canadian dollar,'' Grauman said.
The currency weakened 0.4 percent to C$1.0081 per U.S. dollar at 8:31 a.m. in Toronto, from C$1.0038.
March Decision
Other economists also say the central bank will cut borrowing costs by 50 basis points at its March meeting, instead of the conventional 25 basis points, to reduce the gap with U.S. borrowing costs, which the Federal Reserve this week lowered by 75 basis points to 3.5 percent payday loan.
Governor David Dodge said yesterday in his last press conference before retiring that inflation would slow to 1.5 percent by the middle of the year, giving his successor Mark Carney more room to lower rates. The central bank alters interest rates to keep inflation at or near a target of 2 percent, and uses the core rate as a gauge of future trends.
Consumer prices rose 0.1 percent in December and the core index fell 0.3 percent. Economists correctly predicted the overall index's gain and said the core gauge would drop 0.1 percent in the month.
Prices have been pushed down by a Canadian dollar that rose 15 percent over the past 12 months, central bankers said this week. The currency, which had dropped since reaching a record 90.58 Canadian cents per U.S. dollar on Nov. 7, rose this week after the Fed's move.
Books, Cars
Statistics Canada attributed December's slowdown in annual core inflation to a 7.7 percent drop in prices for books and other printed material. The cost of buying or leasing a car fell 4.1 percent in December from a year earlier, the biggest drop since August 1961, the agency said. Lower prices also were recorded for computers, which cost 14 percent less than a year earlier on cheaper liquid-crystal screens and laptops.
Gasoline prices were 15 percent higher than in December 2006, and the cost of shelter rose 4 percent, as mortgages gained 7.3 percent, the statistics agency said.