Inflation eases, core rate at record low

Rate 'weaker than expected' despite rises in food costs, gasoline
By Louise Egan
|hrreporter.com|Last Updated: 03/18/2011

(Reuters) — Canadian inflation eased in February, defying the trend in many other countries and removing some pressure from the Bank of Canada to soon start raising interest rates again.

Core inflation, which excludes gasoline and other volatile items, slipped to 0.9 percent year-on-year, the lowest level since January 1984, Statistics Canada said on Friday.

The overall consumer price index rose 0.3 percent in the month, the same increase as the previous month, for a 2.2 percent gain year-on-year. That was down from 2.3 percent in January and just below the consensus forecast of 2.3 percent.

"Inflation was weaker than expected despite food costs rising modestly, gasoline rising modestly, but there was really very little inflation pressure in other components," said Sal Guatieri, senior economist at BMO Capital Markets.

Gasoline and restaurant food costs were the biggest contributors to inflation in the year to February. They were partially offset by a sharp drop in traveler accommodation, which tumbled from a year-earlier spike caused by the Winter Olympics in Whistler, British Columbia.

The drop in hotel rates along with lower passenger vehicle prices explained the weak core inflation rate, Statscan said.

"The weak inflation numbers coupled with the global economic concerns should weigh toward keeping the (central) bank on the sideline until July, even in the face of stronger than expected Canadian economic growth," Guatieri said.

The currency was little changed after the data, holding at around $0.9828 to the U.S. dollar, or US$1.0175, and was also firmer than Thursday's North American session close at $0.9863 to the U.S. dollar, or US$1.0139.

Bond prices firmed. The yield on the rate-sensitive two-year Canadian government bond fell to 1. 587 percent from 1.608 percent just before the report.

Contrasts with E.U., U.S.

Large gains in food and energy costs have propelled global inflation rates higher for the past few months.

The Canadian figures contrast with other data showing U.S. consumer prices increased at their fastest pace in more than 1-1/2 years in February and euro zone inflation jumped well above the European Central Bank's target.

The report does little to challenge market expectations that the central bank, which targets 2 percent inflation, will keep its benchmark rate on hold at one per cent for at least the next few months.

"If the bank is worried about global economic growth, it gives them a scope to pause," said Sheryl King, chief economist in Canada at Banc of America Merrill Lynch.

"Rates are going to continue to rise. It may not rise as aggressively as I expected," she said, adding that "markets (are) still probably underestimating how much policy normalization the bank has to do."

The bank lifted borrowing costs from emergency lows three times between June and September 2010 before moving to the sidelines pending more evidence of economic recovery.

Economists and strategists in a Reuters poll on February 24 widely expected the Bank of Canada to resume hiking interest rates on May 31.

Overnight index swaps, which trade based on expectations for the key central bank rate, showed traders scaled back bets for Bank of Canada rate hikes in the coming months. The Reuters calculation of the swaps shows traders see a 96.65 percent chance the bank will hold rates steady on April 12.

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