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Canada Inflation Less Than Forecast to 1.2% in December

Canada’s December inflation rate accelerated less than economists forecast, leaving it near the bottom of the central bank’s target band and reinforcing policy-maker warnings that price gains will be sluggish.

The consumer price index rose 1.2 percent in December from a year earlier following November’s 0.9 percent pace, Statistics Canada said today from Ottawa. The core rate, which excludes eight volatile products, climbed an annual 1.3 percent after a gain of 1.1 percent in the prior month. Economists surveyed by Bloomberg forecast that both rates would advance by 1.3 percent.

“The longer term trend is the Bank of Canada is going to stay quite dovish; they are concerned about inflation,” David Tulk, chief macro strategist at Toronto-Dominion Bank’s TD Securities, said from Toronto in a phone interview. “That’s the story for this year, to see still diminished price pressures.”

On a monthly basis, prices fell 0.2 percent in December while core prices declined 0.4 percent, the most in a year. Both measures matching economist forecasts.

Bank of Canada Governor Stephen Poloz said two days ago the risks of inflation persisting below the midpoint of his 1 percent to 3 percent target band have increased. He also said exports may remain weak even after a drop in the country’s dollar. The currency depreciated to fresh four-year lows after his comments.

Exchange Rate

The Canadian dollar held on to gains following today’s report, trading 0.2 percent higher at C$1.1077 against its U.S. counterpart at 10:10 a.m. in Toronto. Two-year Canadian government bonds yielded 0.97 percent, little changed from yesterday.

Inflation quickened as gasoline prices rose 4.7 percent in December from a year ago and automobile prices rose 1.4 percent, Statistics Canada said today.

Inflation rose at an average pace of 0.9 percent last year, slowing from 1.5 percent in 2012 and the slowest since 2009 when Canada’s economy was emerging from a recession. The annual core rate of 1.2 percent was the least in records back to 1985 according to Krishen Rangasamy, senior economist at National Bank Financial in Montreal.

“Inflation is expected to remain well below target for some time, and therefore the downside risks to inflation have grown in importance,” the central bank said in a Jan. 22 decision to keep its benchmark interest rate at 1 percent.

‘Hopeful Sign’

Today’s report “is a hopeful sign that inflation has started to look a little more normal,” said Craig Wright, chief economist at Royal Bank of Canada. “But we have seen a long period of fairly consistent downside surprises to inflation, not just in Canada but globally, so I don’t think we’re out of the woods just yet.”

Prices are being contained by stronger retail competition, global weakness in food prices and “significant” excess capacity in the economy, Poloz said. He added price gains will remain below target until the end of 2015 and cut his forecast for this year.

The core rate of inflation will be 0.3 percentage points lower this year because of the effect of retail competition, which should fade away by mid-2015, the central bank forecast.

U.S. merchants such as Wal-Mart Stores Inc., Target Corp., and Nordstrom Inc. have expanded in Canada over the last year, while shoppers who live near the U.S. border are taking advantage of higher duty-free exemptions for trips south of the border.

Statistics Canada also said today its seasonally adjusted inflation measure rose 0.2 percent in December from November and the adjusted core rate also rose 0.2 percent.

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