Canada Inflation Rate Remains at Three-Year Low

Canada’s inflation rate held at a three-year low in December, keeping it below the bottom of the central bank’s target band, as food and shelter costs moderated.

The consumer price index advanced 0.8 percent in December from a year earlier, matching November’s increase, Statistics Canada said today from Ottawa. The core rate, which excludes eight volatile products, fell to 1.1 percent from 1.2 percent, the slowest since February 2011. Economists predicted both measures would accelerate, with surveys showing median forecasts of 1.2 percent total inflation and a 1.4 percent core rate.

Bank of Canada Governor Mark Carney said two days ago an increase to his 1 percent policy interest rate is “less imminent” because inflation has been slower than forecast and will remain below the 2 percent target through the first half of next year. The central bank said the consumer price index would increase by an average 1.1 percent in the October-December period and 0.9 percent in the first quarter of this year.

Inflation “is much lower than expected, definitely in line with what the Bank of Canada was alluding to, that price pressures are muted,” said Dawn Desjardins, assistant chief economist at Royal Bank of Canada in Toronto. She also said it adds to signs that rate increases won’t be needed soon.

Canada’s dollar weakened after the report, depreciating as much as 0.7 percent to C$1.0100 per U.S. dollar. The currency traded at C$1.0090 at 11:15 a.m. in Toronto. One Canadian dollar buys 99.11 U.S. cents.

Market Reaction

Government bonds fell, pushing benchmark 10-year yields higher by three basis points, or 0.03 percentage point, to 1.91 percent, as the price of the 2.75 percent security maturing in June 2022 fell 26 cents to C$107.12.

Food inflation slowed to a 1.5 percent year-over-year pace in December from 1.7 percent in November, as fresh vegetables declined 5.8 percent, Statistics Canada said today.

There was a “slightly deflationary environment” in food prices near the end of last year, Empire Co. Chief Executive Officer Paul Sobey said on a Dec. 13 earnings call. Empire controls the Sobeys grocery-store chain.

Prices in the shelter category advanced 0.6 percent, slower than November’s 1 percent pace, as mortgage interest costs dropped 3.6 percent.

Carney said two days ago there are signs consumers are stabilizing debt loads that have reached a record 165 percent of disposable income, adding to reasons to delay raising interest rates.

‘Muted Outlook’

“The more muted inflation outlook and the beginnings of a more constructive evolution of imbalances in the household sector suggest that the timing of any such withdrawal is less imminent than previously anticipated,” Carney, 47, said at a Jan. 23 press conference in Ottawa. The central bank’s policy rate has been 1 percent since September 2010, the longest pause since the 1950s.

“A central bank has to pay attention when inflation is this far away from their target,” said Jonathan Basile, a Credit Suisse economist in New York. “My call for rate hikes at the end of this year is at risk.”

The Bank of Canada pared its forecast for economic growth this year to 2 percent from an October prediction of 2.3 percent. The economy will reach full output in the second half of 2014 instead of the end of 2013, the bank said, as growth accelerates to 2.7 percent next year.

On a monthly basis, total inflation and the core rate both fell 0.6 percent in December. Economists surveyed by Bloomberg predicted both measures would fall by 0.2 percent. The decline in the core rate was the largest since June 2011.

Seasonal Adjustment

Seasonally adjusted inflation fell 0.1 percent in December from November and seasonally adjusted core inflation rose 0.1 percent.

The annual average inflation rate slowed to 1.5 percent last year from 2.9 percent in 2011, Statistics Canada said. Gasoline price gains slowed to 2.5 percent, from 20 percent and food inflation moderated to 2.4 percent from 3.7 percent. The annual average increase in core inflation accelerated to 1.7 percent from 1.6 percent.

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