Canada Inflation Stays Below Bank of Canada Target Band

Canadian inflation held below the central bank’s target band for a second month while retail sales unexpectedly fell, suggesting weak consumer demand will lead Governor Stephen Poloz to prolong a period of low interest rates.

The consumer price index rose 0.9 percent in November from a year ago, Statistics Canada said today from Ottawa, while the core rate excluding eight volatile items unexpectedly slowed to to 1.1 percent from the 1.2 percent pace in October. Retail sales for October fell 0.1 percent on a decline at new car dealerships, the first drop in four months.

Poloz said in a Dec. 17 interview that inflation has been lower than policy makers can explain, and broad weakness in foreign and domestic demand led him to drop a bias to raise interest rates. Consumers have been the main driver of Canada’s economy, with low interest rates encouraging housing and automobile sales.

“Today’s duo of key reports reinforces the message that Canada looks locked in a world of 1 percent inflation, with moderate growth unlikely to shift that reality,” said Doug Porter, chief economist at BMO Capital Markets in Toronto. The data “will provide no comfort” to Poloz, he said.

The Canadian dollar fell after the reports weakening as much as 0.7 percent to C$1.0738 per U.S. dollar, the lowest since May 2010. It traded at C$1.0703, a 0.4 percent decline, at 10:26 a.m. in Toronto. Government bonds rose, with the five-year security falling 3 basis points to 1.84 percent.

Mortgage Interest

Inflation trailed the 1 percent median forecast in a Bloomberg survey in November, as mortgage interest and women’s clothing were cheaper.

“Inflation has been too low for the Bank of Canada’s liking, and November’s news added more to their worries,” said Avery Shenfeld, CIBC World Markets chief economist in Toronto. The figures “will prolong the dovish talk we’ve seen out of the Bank of Canada of late.”

The inflation and retail declines add to evidence of weakness in the world’s 11th largest economy, which has also seen trade deficits in 21 of the past 22 months.

Clothing costs declined 0.4 percent in November led by women’s apparel, Statistics Canada said, and mortgage interest costs fell 2.1 percent.

Energy costs rose 2.3 percent in November from a year earlier, after they fell 1.6 percent in October, Statistics Canada said. Food inflation quickened to 1.1 percent from 0.9 percent as fresh vegetable costs jumped 12.1 percent.

Monthly Inflation

On a monthly basis, consumer prices were little changed in November and the core inflation rate declined 0.1 percent.

Seasonally adjusted inflation rose 0.2 percent in November and adjusted core prices were unchanged.

The Bank of Canada sets monetary policy to keep inflation in the middle of a 1 percent to 3 percent target band. The bank predicted in October inflation would average 1.3 percent in this quarter, and the core rate would average 1.4 percent.

The retail sales decline was led by motor vehicle and parts, which dropped 1.9 percent to C$9.51 billion. Economists surveyed by Bloomberg News forecast total retail sales would rise 0.2 percent, based on the median of 20 projections.

Excluding the auto sector, retail sales rose 0.4 percent on the month, up from a revised 0.2 percent gain in September.

The volume of retail sales rose 0.2 percent, Statistics Canada said. That measure excludes the effects of price changes and more closely reflects the industry’s contribution to economic growth.

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