Canadian Inflation Quickens


Canada's annual inflation unexpectedly accelerated for the first time in six months in April, giving the Bank of Canada less scope to lower the country's benchmark interest rate.

Consumer prices rose 1.7 percent from a year earlier, Statistics Canada said today, led by fuel and mortgage costs. Economists surveyed by Bloomberg said inflation would stay at March's 1.4 percent pace, a 14-month low. Consumer prices rose 0.8 percent from March, the fastest in more than a year and twice as much as economists forecast.

The Bank of Canada has cut its rate at each of its past four meetings, lowering it to 3 percent from 4.5 percent in December. Canada's dollar gained as the report indicated that higher prices, coupled with improving credit markets, may mean the central bank will soon end its series of rate cuts.

The currency strengthened 0.8 percent to 98.45 cents per U.S. dollar at 8:49 a.m. in Toronto from 99.23 cents yesterday.

Bank Governor Mark Carney lowered the key rate by half a percentage point to 3 percent last month and signaled more action was needed.

Inflation remains below the Bank of Canada's 2 percent target and economists say the central bank will cut interest rates at least once more to offset a slowing economy.

While inflation is creeping higher in other countries as energy and food costs rise, prices have been restrained in Canada by the currency's effect on imports and competition among grocers, the central bank said last month. The Bank of Canada said risks to its inflation projection are ``balanced.''

Canada's inflation rate is lower than the U.S. pace of 3.9 percent and Germany's 2.4 percent pace.

The Bank of Canada will likely cut interest rates by another 50 basis points at its June 10 meeting, Scotia Capital said in a note to investors following today's report.

Gasoline rose 12 percent in April from a year ago as overall fuel costs surged 37 percent, while mortgage interest costs rose 8.7 percent, the fastest since May 1991.

Inflation accelerated in April in part because car dealers scaled back price discounts, Statistics Canada said. The cost of bakery products also rose 10 percent in April from a year earlier, the fastest since November 1981.

The core inflation rate advanced 1.5 percent from a year earlier, compared with 1.3 percent in March that was the slowest since July 2005. Economists predicted that measure would be unchanged. The monthly core inflation rate of 0.3 percent was also faster than the 0.2 percent economists forecast.

The core rate, used by policy makers as a guide to future trends, excludes volatile items such as gasoline and fruit and discounts tax cuts such as a reduction in the federal sales tax earlier this year.

Bank of Canada policy makers last month said inflation would stay below their 2 percent target until 2010, as a strong Canadian dollar makes automobiles cheaper and grocery stores compete to keep food prices down.

The currency's surge to parity with the U.S. dollar last year prompted consumers to demand lower prices for imports such as cars and books, and acted as a shield against more expensive commodities priced in U.S. dollars. The currency hit a record 90.58 Canadian cents per U.S. dollar on Nov. 7.

 


TradingEconomics.com, Bloomberg
5/21/2008 6:45:34 AM