Inflation rate eased in September

OTTAWA—Canadian inflation came off the boil last month and began what is expected to be a long slide that could see falling prices—rather than rising—become the next economic conundrum facing the country.
Statistics Canada reported today that annual inflation cooled by 0.1 point to 3.4 percent in September, just off August’s five-year high.

Gasoline continued to power the headline rate while core inflation, excluding volatile food and fuel items, remained tame at 1.7 percent—below the Bank of Canada’s two percent target.
The central bank has predicted a year-long slowing of the rise in the cost of living toward one percent rate in mid-2009. And Bank of Nova Scotia economist Derek Holt believes Canada could experience deflation—a rare phenomenon of declining general price levels—next year.
“With credit channels around the world impaired, and with incomes and wealth facing a further hit, that’s not an environment where prices are going to go up for many categories,” Holt explained.
“The problem comes if people and companies expect prices to drop, they start to postpone consumption because those prices will be cheaper later . . . so that only makes the downside risk facing the economy a self-filling prophecy.”
There is little doubt that price increases will slow further, agreed Douglas Porter of BMO Capital Markets. He estimates gasoline prices are on track to fall more than 15 percent in October—largely taking the steam out of the consumer price index.
“Inflation is rapidly becoming the least of policy-makers’ concerns,” Porter said.
“While this report doesn’t make it obvious, Canadian inflation is poised to soon recede meaningfully, even with the recent steep sell-off in the loonie,” he added.
Krishen Rangasamy, an economist with CIBC World Markets, said Bank of Canada governor Mark Carney will feel little restraint from cutting interest rates further on Dec. 9. The central bank already has slashed the cost of short-term money by three-quarters of a point this month to stimulate the economy.
About one-third of September’s inflation rate was attributable to a 10-cent-a-litre spike in gasoline prices blamed on Hurricane Ike hitting Gulf Coast refineries. That left gasoline 26.5 percent more expensive than in September, 2007, Statistics Canada said.
Excluding gasoline, prices would have risen only 2.2 percent last month on an annual basis, StatsCan noted.
While fuel costs now are easing with the dramatic decline in global oil prices, some inflationary pressures remain, the Statistics Canada data indicated.
The food index was up 5.6 percent from a year earlier in September, accelerating from a 4.5 percent August increase as prices for baked goods and cereal products ballooned 15.5 percent year-over-year.
“Just as Canadians finally get to enjoy cheaper gasoline, they get slapped with higher food prices,” CIBC’s Rangasamy commented.
“After initially bucking global trends, Canada’s food CPI has soared over the last six months, with an annualized increase of nearly 10 percent over the period.
“With the loonie currently flying low, food imports will likely cost more over the coming months, countering for price declines on other consumer products,” Rangasamy noted.