Canada Had Fastest Inflation in 2011 Since Central Bank Began Targeting
Consumer prices in Canada probably grew last year at the fastest average rate since the country’s central bank began targeting inflation in 1991.
Statistics Canada’s consumer price index rose 2.7 percent in December from a year earlier following November’s 2.9 percent pace, according to median estimate of 23 economists surveyed by Bloomberg News. The projected gain would bring the average year-over-year inflation rate to 3 percent for 2011, the fastest in two decades. The report is due at 7 a.m. in Ottawa.
Bank of Canada Governor Mark Carney kept his benchmark interest rate at 1 percent this week, prolonging a 15-month pause. The central bank also said inflation would slow to a 1.5 percent annual pace in the April-June period, faster than the 1 percent trough it forecast in October.
The central bank is in an “uncomfortable” position with inflation currently so far above its 2 percent target, said Charles St-Arnaud, economist and foreign exchange strategist at Nomura Securities International in New York and a former central bank analyst. “We would need to see a broadening of inflation pressure” for the Bank of Canada to react, he said, adding the price gains have been concentrated in food and energy.
The average year-over-year increase for gasoline in 2011 has been 20.1 percent through November, more than double the 2010 pace, according to Statistics Canada data. Food price increases have averaged 3.7 percent in 2011 through November, compared with 1.4 percent the year before.
Core Inflation
The central bank’s core inflation rate, which excludes eight volatile items such as gasoline, probably rose 2.2 percent in December from the same month in 2010, according to a Bloomberg survey, and has averaged 1.7 percent through November. The central bank uses core inflation as a signal of future inflationary pressures.
“The overall inflation profile is marginally firmer in this projection, partly reflecting some expected persistence in the slightly higher-than-anticipated prices observed recently for motor vehicles and electricity,” the bank said in its Jan. 18 Monetary Policy Report.
Carney has said that he has “flexibility” in how soon he brings inflation back to its target during an economic recovery that may be prolonged by the need for countries to reduce large trade and budget deficits. The bank said this week that economic output will remain below its potential through the third quarter of next year, suggesting downward pressure on prices.
A slowing world economy may also help moderate price gains. Global growth of about 2.5 percent this year suggests that commodity prices, including energy, will weaken this year, said Dina Cover, an economist at Toronto-Dominion Bank in Toronto.
Investors are anticipating inflation will be close to 2 percent, based on the gap between regular 10-year government bonds and securities whose payouts fluctuate to adjust for changes in inflation. The so-called break-even rate on 10-year bonds was 2.08 percent yesterday.
“The bank has been targeting inflation for 20 years and they have been very successful,” said Nathan Janzen, an economist at Royal Bank of Canada in Toronto. “They have been highlighting core as the big thing, and they are trying to highlight where inflation will be.”
To contact the reporter on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net
To contact the editors responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net; David Scanlan at dscanlan@bloomberg.net.
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