Canadian Core Prices Slow


Canada's annual inflation rate excluding volatile items such as gasoline was the slowest since July 2005 last month, contained by a sales-tax cut and lower car prices, giving central bankers room to lower interest rates.

Core prices rose 1.4 percent in January from a year earlier, slowing for the seventh straight month and below the central bank's target for a fourth month, from 1.5 percent in December.

The report supports the Bank of Canada's prediction that core inflation will slow to 1.3 percent by midyear, allowing policy makers to cut interest rates again to shield the economy from a possible U.S. recession. Central bankers last month lowered the benchmark rate a quarter point to 4 percent.

The central bank alters borrowing costs to keep inflation at or near a target of 2 percent, and uses the core rate as a gauge of future trends. Policy makers say inflation will return to their target at the end of the year.

The year-over-year all-items index slowed to 2.2 percent, the smallest gain since August, from 2.4 percent in December, matching economists' forecasts. On a monthly basis, prices fell 0.2 percent in January and the core index gained 0.1 percent.

Statistics Canada attributed January's slowdown in annual core inflation to a 4.9 percent drop in the cost of buying or leasing a vehicle as manufacturers offered rebates on new models, as well as a 17 percent decline in the cost of computer equipment and supplies. Lower prices also were recorded for women's clothing.

Still, gasoline prices were 21 percent higher last month than in January 2007, the biggest gain since September 2005, and the cost of shelter gained 3.8 percent, as mortgages rose 7.6 percent, the sharpest rise since May 1991, the statistics agency said.

The Canadian dollar's 16 percent advance in the past 12 months against its U.S. counterpart has helped push prices down by making imported goods cheaper, central bankers said last month. The currency, which had retreated since reaching a record 90.58 Canadian cents per U.S. dollar on Nov. 7, has traded around parity since the beginning of December.

Economists say the bank will cut borrowing costs at its March 4 rate meeting, with some predicting a reduction of 50 basis points instead of the conventional 25 to reduce the gap with the U.S. Federal Reserve's 3 percent benchmark.

 


TradingEconomics.com, Bloomberg
2/19/2008 6:52:58 PM