Inflation falls for third consecutive month

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Inflation falls for third consecutive month

The Canadian Press Published Thursday, September 17, 2009 10:51AM EDT

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OTTAWA - Canada's annual inflation rate remained firmly in negative territory in August for the third consecutive month and economists now believe the Bank of Canada will keep interest rates at record lows for at least another year.

Statistics Canada said the annual rate of inflation was a negative 0.8 per cent last month. That means prices generally continued to fall from their year-earlier comparisons but the decline was smaller than in July when the minus 0.9-per-cent reading was a 56-year low.

But it appears recent wild swings in prices of key items like gasoline and food are settling down, while core inflation excluding those items remains at about 1.6 per cent, suggesting that Canada is heading into a period of low but stable inflation.

"Inflation is not a concern in Canada and neither is deflation," said CIBC economist Krishen Rangasamy.

"We think core inflation is going to fall further and so the bank will have even less reason to raise rates throughout 2010. Certainly the bank won't move before June."

Bank of Canada governor Mark Carney has issued a conditional commitment to keep the policy rate at the record low of 0.25 per cent until next summer, but with the economy showing strong signals of a recovery, some analysts had speculated interest rates may be raised earlier.

RBC economist Dawn Desjardins agreed that it looks less likely now that the central bank will be tempted to raise its key interest rates early.

"Despite signs that Canada's economy emerged from recession in the summer, we expect that the Bank of Canada will keep its focus on ensuring that the growth revival remains on track," she explained.

In a note, Scotiabank economists Derek Holt and Karen Cordes called inflation in Canada mostly "well behaved" once the volatile energy sector is removed.

But even that sector, dominated by gasoline prices, moderated and is expected to further smooth out in upcoming months.

Gasoline was down 21.2 per cent from a year ago, when oil was just coming off a record high US$147 a barrel in July 2008. Still, the August-to-August differential is less dramatic than the 28.3 per cent drop-off on a year-to-year basis seen in July.

On a monthly basis, gasoline prices were actually 2.6 per cent higher in August than in July of this year.

Unless there is dramatic change in current oil prices, that upward trend in gasoline prices is expected to continue in the upcoming months and will be less of a factor in pushing the consumer price index lower.

Economists believe the inflation rate will again rise above zero in November, which will be compared with a year-earlier month when gasoline prices tumbled dramatically as recession tightened its grip.

Food prices, the leading cause pushing inflation higher for most of the past year, are also cooling. Prices remain four per cent higher than last August, but that is lower than the five-per-cent gain recorded in July and 5.5 per cent in June.

On a monthly basis, food actually cost 0.7 per cent less in August than in July.

With both volatile items becoming less so, the headline inflation number is moving close toward the Bank of Canada's core inflation index.

Taking energy out of the calculation, prices in Canada would have gained 1.4 per cent, which economists say is a more accurate reading of price changes over the past year.

The Bank of Canada core index, which excludes both energy and some foods that have changeable prices, stood at 1.6 per cent last month, slightly lower than in July and heading lower.

The moderating trend is a key reason economists do not believe Canada is experiencing deflation, defined as a broad-based and prolonged period of falling prices that can cause problems for the economy.

Nor is inflation likely to spurt to life any time soon -- even in an improving economic climate -- particularly with the strengthening dollar helping to keep prices for imports in check.

Overall inflation may be negative in Canada, but most items cost more today than they did a year ago, a testament to the heavy weight gas prices exert on the index.

Only three of the eight major components that comprise consumer price index recorded declines in August -- transportation, which includes gasoline, as well as shelter, and clothing and footwear.

The cost of purchasing a vehicle declined 4.7 per cent in August. Lower natural gas prices, house values and mortgage costs drove the shelter component down 2.2 per cent. And clothing and footwear prices fell 1.7 per cent.

Meanwhile, food, household operations, furnishings and equipment, health and personal care, recreation, education and reading, and alcohol and tobacco all cost more in August than a year ago.

Regionally, only Quebec and Saskatchewan recorded positive if moderate inflation in August.

Here's what happened in the provinces and territories. (Previous month in brackets):