Canada's Annual Inflation Rate Falls to Six-Month Low

Canada's annual inflation rate fell to a six-month low in February, as car prices plunged and gasoline costs eased, supporting the case for a fourth straight interest-rate reduction in April., Bloomberg 3/18/2008 6:57:07 AM

Consumer prices rose 1.8 percent in February from a year earlier, dropping below the central bank's target for the first time in seven months from 2.2 percent in January. Economists correctly forecast the decline, based on the median of 21 estimates.

The report suggests the Bank of Canada will lower borrowing costs again to boost economic growth in the face of a possible U.S. recession. Central bankers this month reduced the benchmark rate 50 basis points to 3.5 percent and economists say the bank will cut 75 basis points more by the end of the second quarter, according to the median of 13 responses in a Bloomberg survey.

The Bank of Canada alters borrowing costs to keep inflation at or near a target of 2 percent. The central bank said March 4 when it last lowered rates that inflation risks have ``clearly shifted to the downside.''

Still, core inflation -- which excludes volatile items such as gasoline -- accelerated for the first time since June to 1.5 percent from 1.4 percent in January. Economists forecast the core rate, which the central bank uses as a gauge of future trends, would fall to 1.2 percent, the median of 21 estimates.

On a monthly basis, the all-items index rose 0.4 percent in February and the core index gained 0.5 percent, faster than the 0.3 percent that economists predicted for both gauges.

Statistics Canada attributed February's slowdown in annual inflation to a 6.8 percent drop in the cost of buying or leasing a car, the biggest decline since February 1956, on discounts for 2008 models. The agency said such price cuts normally appear later in the year as new models are unveiled.

Also, vegetables were 17 percent cheaper than a year ago, the biggest decline since March 1996, and fruit prices dropped 15 percent.

The Canadian currency's rise to parity with the U.S. dollar last year prompted consumers to demand lower prices for imports such as cars, books and electronics.

The so-called loonie has gained 18 percent in the past 12 month and traded close to parity since early December. It strengthened 0.2 percent to 99.59 Canadian cents per U.S. dollar at 7:50 a.m. in Toronto from 99.79 cents yesterday.

Prices for computers and related equipment dropped 15 percent from a year ago, Statistics Canada said.

Gasoline prices were 17 percent higher last month than in February 2007, compared with a 21 percent gain in January, and the cost of interest on mortgages rose 8.1 percent, the eighth straight increase, as home prices continued to gain.