Inflation rate tumble raises deflation angst

OTTAWA—Consumer prices in Canada tumbled last month in their steepest one-month drop in nearly half-a-century as falling energy prices chopped the annual inflation rate by almost a full point to 2.6 percent from 3.4 percent in September.
The dive—a full point on an unadjusted month-to-month basis—raised the spectre that Canada could be heading for a period of deflation, in which the economy shrinks and prices drop.

“Canadian deflation fears mount,” Scotia Capital economist Karen Kordes headlined in her research note to clients this morning.
“While we were expecting headline inflation to decline in October as energy prices softened substantially during the month . . . the details show that almost every component fell, illustrating widespread discounting.”
Consumer confidence has been badly shaken by fears of a global recession, leading to stock markets that plunged sharply in October as governments around the world expressed pessimism and massive bailout plans were floated to prop up faltering American banks.
Oil prices also have dropped by nearly two-thirds since reaching a record high of about $147 (U.S.) a barrel in mid-July as global recession fears raised concerns energy demand will drop sharply in North America, Europe, and Asia.
The big item influencing the inflation index, as has been the case for most of the year, was the price of gasoline, which saw an overall drop of 13.4 percent last month from September.
Gas prices remained 13.3 percent higher than they were last October, and have fallen sharply again this month—to under 80 cents a litre in many markets—indicating that the inflation rate is likely to take another tumble, noted BMO deputy chief economist Douglas Porter.
Still, Porter said deflation is less likely in Canada as in the rest of the world, where economies appear to be braking faster. As well, he said the falling Canadian dollar—down more than 20 percent from last year’s levels—will act as a check against outright deflation as prices for imports rise.
CIBC World Markets economist Avery Shenfeld agreed, saying inflation “is simply not a problem, being low enough for the Bank of Canada to go all-out to get the economy moving, but not seriously threatening the much dreaded deflation disease.”
Economists fear deflation because consumers and businesses are more likely to delay purchases hoping that prices will fall further, slowing economic activity and business investments.
The evidence for impending deflation lies in the slowing price growth and, in many cases, outright decline in almost all components measured by Statistics Canada, with the exception of food, which rose for the eighth-straight month in October.
Overall, food prices were 6.1 percent higher in October than last year, Statistics Canada said.
Food purchased in grocery stores was 7.3 percent higher while baked goods were up 14.2 percent. Staples such as bread rose 17.7 percent and pasta was up 37.1 percent year-over-year.
Canadians also paid more for housing in October as mortgage interest costs rose 7.2 percent, shelter expenses were up 3.8 percent, and property taxes rose 3.2 percent.
But with the exception of property taxes, the October increases in the housing component was lower than the previous month.
In many other cases, Canadians saw prices chopped in October, particularly in discretionary goods where purchases can be postponed.
The cost of buying or leasing a vehicle fell nine percent, computer equipment and supplies dropped 12 percent, and clothing and footwear slipped 2.8 per cent. Furniture and auto insurance also were lower.
“That’s a indication of the consumer pulling back,” said Porter. “With notable weakness in a variety of core components adding to the deep dive in gasoline, the Bank of Canada has the all-clear signal to continue cutting [interest] rates.”
The only question, said Porter, is whether the next interest rate action on Dec. 9 will be a quarter-point or a half-point, with some now suggesting a three-quarter point cut to 1.5 percent for the overnight rate may be in play.