Canada Inflation Slows Toward Bottom of BOC Band

Canada’s inflation rate slowed to close to the bottom of the central bank’s target band last month on lower gasoline and clothing prices.

The consumer price index rose 1.1 percent in February from a year ago following a 1.5 percent January increase, Statistics Canada said today from Ottawa. The core rate, which excludes eight volatile products, increased 1.2 percent after a gain of 1.4 percent the prior month. Economists surveyed by Bloomberg forecast that the total rate would slow to 1.0 percent and that core inflation would be 1.1 percent.

Canada’s dollar rose after the faster-than-expected price gains and another report of higher retail sales showed less pressure on Bank of Canada Governor Stephen Poloz to cut interest rates. Three days ago, Poloz said looser policy couldn’t be ruled out if the economy worsened. The central bank forecast in January inflation will return to the 2 percent target around the end of next year.

“We are still seeing generally modest inflation pressures,” Sal Guatieri, senior economist at BMO Capital Markets, said by telephone from Toronto. “We will see some upward drift in inflation in coming months.”

The Canadian dollar rose 0.3 percent to C$1.1213 per U.S. dollar at 10:54 a.m. in Toronto, after touching four-year lows earlier this week. The currency’s decline this year will help boost inflation by raising import costs, Guatieri said.

Retail Sales

Another sign of economic strength came with Statistics Canada also reporting that retail sales rose at the fastest pace in eight months in January, rebounding with a 1.3 percent increase after December’s 1.9 percent drop.

Gasoline prices fell 1.3 percent in February on a 12-month basis after a January increase of 4.6 percent, and clothing costs swung to a 0.4 percent decline from January’s 1.5 percent gain.

The biggest contributors to the rise in prices were a 2.2 percent gain in shelter costs and the 1.1 percent rise in food prices, Statistics Canada said.

Poloz said at a speech three days ago that “looking through the short-term volatility, inflation still seems to be running at around 1.2 percent, give or take a tenth or two.” The bank forecast in January that total inflation would average 0.9 percent this quarter and the core rate would average 1 percent.

Reduces Risk

The core inflation gain of 1.2 percent last month “substantially reduces the risk of a move below the critical 1 percent threshold in coming months,” CIBC World Markets economist Peter Buchanan wrote in a client note. That moves the focus from a possible rate cut to core prices that may quicken to near the 2 percent pace by year end, he said.

On a monthly basis, total inflation rose 0.8 percent in February and the core rate rose 0.7 percent, both the biggest increases in a year.

Economists surveyed by Bloomberg predicted that monthly prices would rise 0.6 percent and the core rate would increase 0.5 percent.

Seasonally adjusted inflation rose 0.3 percent in February and the adjusted core rate rose 0.2 percent.

The central bank said in January that inflation is being contained by an increase in retail competition and global weakness in food prices. The core rate of inflation, which excludes eight volatile items, will be 0.3 percentage points lower this year because of that competition before the effect fades away by mid-2015, the Bank of Canada forecast.

U.S. Merchants

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.

The Sobeys grocery store chain’s same-store sales fell 0.2 percent in its fiscal third quarter in part because it had little power to raise prices, the unit of Empire Co. of Stellarton, Nova Scotia, reported March 13.

“Same-store sales were impacted by low food inflation, which we pegged around 0.5 percent lower than the published consumer price index, and also by increased competitive square footage in the market,” Chief Financial Officer Francois Vimard said on an earnings call.

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