Inflation within central bank comfort zone

Higher gasoline prices pushed Canada's annual inflation rate to 1.3 per cent in December, the fastest pace since February of 2009 but below what economists expected and well within the Bank of Canada's comfort zone.

On a month-to-month basis, consumer prices fell 0.3 per cent from November, Statistics Canada said Wednesday.

The core annual inflation rate, which excludes volatile goods such as gasoline, and which the Bank of Canada uses as a guide in monetary policy, was 1.5 per cent in December.

The consumer price report helped push down the Canadian dollar, signalling that the Bank of Canada can continue to hold its benchmark lending rate at a historic low as it need not fear inflationary pressures at this point.

On Tuesday, the central bank kept its overnight rate at 0.25 per cent and promised again to hold it there until at least midyear depending on inflationary pressures.

“While Canadian headline inflation has ticked higher in recent months, the upswing has actually been much milder than that seen in most of the rest of the industrialized world due to base effects,” said BMO Nesbitt Burns deputy chief economist Douglas Porter. “U.S. inflation, for example, jumped to 2.7 per cent last month, while Britain's rate jumped to 2.9 per cent. The strong Canadian dollar is helping keep both headline and core inflation in check. While there is likely to be one more bump higher in next month's report, underlying inflation trends are expected to recede thereafter amid a slack economy and the hard-working loonie. At the margin, this report further reduces the need for the Bank to consider a quick exit strategy from its highly stimulative policy stance.”

Also notable in the Statistics Canada report was that mortgage interest costs fell on an annual basis by 4.9 per cent, following on the heels of a 4-per-cent decline in November.

Michael Babad

Globe and Mail Update Published on Wednesday, Jan. 20, 2010 7:10AM EST Last updated on Wednesday, Jan. 20, 2010 7:30AM EST

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