Canada October CPI rises after 4-month decline
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Updated: November 18, 2009 5:03 AM
By Louise Egan
OTTAWA (Reuters) - Inflation returned to Canada in October after a short deflationary bout but prices remained tame and are not expected to sway the Bank of Canada from holding interest rates at a record low until mid-2010.
The consumer price index climbed 0.1 percent in the year to October, Statistics Canada said on Wednesday, the first upward movement since May but still below the average forecast in a Reuters poll of a 0.3 percent gain. Prices slipped 0.1 percent on the month.
Core inflation, however, came in higher than expected at 1.8 percent, up from 1.5 percent in September after gaining 0.1 percent in the month.
"There is a little bit of heat in this report," said Eric Lascelles, chief economics and rates strategist at TD Securities.
"Headline CPI exited that technical state of deflation which is more symbolic than anything else but still attracts some attention," he said.
The Canadian dollar was little change following the report, trading at C$1.0461, or 95.59 U.S. cents, compared with C$1.0469, or 95.52 U.S. cents, just before the data.
Gasoline prices fell 13.1 percent in October from a year earlier, compared with a 23 percent drop in September as the base effect of skyrocketing gas prices in 2008 began to lessen.
Upward pressure on the CPI in October came mainly from food, household operations, furniture and equipment, and tuition and reading material.
BACK ON THE RADAR
Inflation concerns faded to the background during the financial crisis as the Bank of Canada and the government focuses on stimulating the economy through low rates and extraordinary spending.
As the economy gradually gains its footing, price pressures will reappear on policy makers' radar but most economists expect inflation to stay well below the central bank's 2 percent target for some time.
"If you look at the longer run, the economy is still well below capacity and the labor market and unemployment rate still too high, so wage pressure is going to be downward rather than upward," said Craig Wright, chief economist at Royal Bank of Canada.
"Inflation expectations are still fairly low and anchored and all that alongside a strong currency should keep any inflationary pressures in check."
The Bank of Canada has cut its overnight rate to a historic low of 0.25 percent and pledged to keep it there until at least the end of June next year, as long as inflation stays on track.
It said last month that inflation looked more subdued than it previously thought and predicted it would return to its 2 percent target in the third quarter of 2011, one quarter later than it previously expected.
It sees CPI, which fell 0.9 percent in the third quarter, rising 1 percent in the fourth quarter.
(Additional reporting by Frank Pingue and Scott Anderson in Toronto; Editing by Jeffrey Hodgson)
