Inflation falls as gas and food prices drop.

OTTAWA—Inflation in Canada fell sharply last month to 2.3 per cent, as prices for most major items — from gasoline and food, to cars and clothing — plunged in December.

The 0.6 per cent decline both in the annual rate, and the actual decrease in consumer prices from the previous month, was among the steepest one-month decline reported by Statistics Canada since the summer of 2009, when the country was in recession.

Analysts had expected prices to cool in December due to Christmas season sales, but not by this much. The consensus was for a 0.4 per cent falloff.

But it was only the scale of the decrease that was surprising, not the trend. The Bank of Canada this week predicted annual inflation would fall to about 1.5 per cent by the second quarter of this year.

As expected, pump prices saw the steepest decline, with the year-over-year growth falling to 7.6 per cent from 13.5 per cent in November as the cost of filling up fell three per cent in one month.

“Gas prices have declined steadily on a monthly basis since June,” the federal statistical agency noted.

Other major items that go into the inflation index also fell in December. Food inflation dipped from 4.8 per cent in November to 4.4 per cent in December, although common staples such as meat, bread and fresh vegetables saw bigger increases.

Purchasing a car was also less expensive in December, by 2.3 per cent, as manufacturers continued to offer discounts, including on new 2012 modes, the agency said.

And clothing cost 5.1 per cent less last month, likely as a result of Christmas season sales, than it had in November.

Overall, the agency said prices declined in five of the eight major components it tracks, bringing the inflation rate for 2011 as a whole to 2.9 per cent, just within the Bank of Canada’s broad one-to-three per cent range. Still it was the highest average rate in several years.

The central bank’s core index, which excludes volatile items such as gas and some foods, dipped below the two-per-cent target to 1.9 per cent.

Items that saw a price increase from November included electricity, fresh vegetables and fruit, homeowner replacement costs and financial services, although the gains on average tended to be modest.

Regionally, prices rose at a slower rate in every province except Prince Edward Island last month. New Brunswick posted the highest annual rate of price inflation at 3.3 per cent, while British Columbia was the lowest, at 1.7 per cent.

Inflation picture in cities

Canada's national annual inflation rate was 2.3 per cent in December, Statistics Canada says. The agency also released rates for major cities, but cautioned that figures may fluctuate widely because they are based on small statistical samples (Previous month in brackets):

St. John's, N.L., 3.2 (3.9)

Charlottetown-Summerside, 2.7 (2.7)

Halifax, 2.5 (3.3)

Saint John, N.B., 3.2 (3.8)

Quebec, 2.5 (3.3)

Montreal, 2.2 (2.9)

Ottawa, 1.9 (2.5)

Toronto, 2.2 (2.6)

Thunder Bay, Ont., 2.0 (2.6)

Winnipeg, 2.6 (3.0)

Regina, 2.8 (3.1)

Saskatoon, 2.2 (2.6)

Edmonton, 2.9 (3.2)

Calgary, 2.8 (2.9)

Vancouver, 1.9 (2.3)

Victoria, 1.5 (2.1)

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Bank of Canada Holds Rate at 1%

The Bank of Canada held its key interest rate steady Tuesday, as expected, but hinted more strongly than before that it would resume hiking soon as the sturdy domestic economy contrasts with rising risks globally.

Keeping its overnight rate at 1 percent, the bank said core inflation will reach its 2 percent target earlier than it had anticipated and that it sees economic growth speeding up in the second half of this year after a second-quarter slump.

Canada’s central bank became the first in the Group of Seven advanced economies to tighten monetary policy following the global financial crisis, hiking three times from June to September last year.

It has been on pause since then, but with an eye on threats abroad such as the weakening U.S. economy and the European sovereign debt crisis that threaten to derail growth at home.

The bank’s comments were more hawkish than markets expected, pushing the Canadian dollar to a two-month high against the U.S. dollar.

The median forecast of 37 analysts in a July Reuters poll was for a resumption of rate increases in the fourth quarter, which means either at the Oct. 25 or Dec. 6 rate decision.

But the bank did flag several caveats to hiking rates and advised that its projections assume that European leaders will be able to contain the sovereign debt crisis.

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Bank of Canada Rate Remains Unchanged

Once again, the Bank of Canada announced it would keep the key interest rate at a record-low 0.25 per cent to achieve its inflation target of two per cent.
While the Bank said economic growth in Canada resumed in the third quarter of 2009 and there has been a slightly higher than expected rate of inflation in recent months, it reiterated that the economy is still lagging, particularly due to factors like a strong Canadian dollar and low levels of U.S. demand.

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No Change to Rates at Bank of Canada’s Meeting

The Bank of Canada left its key lending rate at 0.25%…as pretty much the whole world expected.

Not much changed from the Bank of Canada’s last announcement in October. In its statement today it said:

• “The target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010.”
• “While significant fragilities remain, global economic developments have been slightly more positive and the global outlook has improved modestly…”
• “The Bank continues to expect…inflation to return to the 2% target in the second half of 2011.”
• “The overall risks to (the Bank of Canada’s) inflation projection are tilted slightly to the downside.”

The Bank of Canada’s main focus, of course, is controlling inflation. There has been nowhere near enough strong economic news for it to consider raising rates—nor do economists expect any for a while to come.

The next Bank of Canada’s interest rate meeting is January 19, 2010.

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