Loonie nibbles away at inflation
A strong dollar put the brakes on Canada's inflation rate last month as retailers began to cut prices, underscoring expectations that the Bank of Canada will cut interest rates.
Both core and overall consumer prices came in below expectations. The consumer price index slowed to a 2.4-per-cent pace in October, dipping from the 2.5-per-cent pace in September, Statistics Canada said Tuesday.
Core prices, which strip out the most volatile prices in the index, hit a 16-month low of 1.8 per cent amid discounts for buying and leasing cars. Car makers such as BMW Canada and Mercedes-Benz Canada started issuing rebates last month as the dollar traded above parity. Retailers such as Zellers and Canadian Tire also cut prices in October as Canadians increasingly shopped across the border.
“There will likely be more price damping in November's consumer price index and beyond, as the loonie's flight above parity caused a ‘social epidemic' of cross-border price comparisons and much less willingness to accept the large discrepancies between Canadian and U.S. prices,” said Michael Gregory, senior economist at BMO Capital Markets in a note.
“It's looking more likely that [Bank of Canada Governor] David Dodge's swan song will be rate cuts,” Mr. Gregory added.
Economists had expected the overall rate last month would be 2.8 per cent and the core rate 2 per cent.
“Inflation pressures in Canada have clearly come off the boil,” said Jacqui Douglas, economics strategist at TD Securities. “The odds are certainly tilted towards rate cuts in Canada, and possibly as soon as the next fixed-announcement date on Dec. 4.”
The cost of buying and leasing a car fell 2.4 per cent “the main factor in dampening the rise in consumer prices,” Statscan said, noting that manufacturers offered more discounts on 2007 models.
The strong dollar may be keeping a lid on import prices. Prices for fresh vegetables tumbled 14.6 per cent in October — the largest annual drop in 11 years, following a 9.2-per-cent decline in September.
Prices for computer equipment and supplies also cooled inflation.
Upward pressure on inflation still exists. Gasoline, mortgage interest costs and homeowners' replacement cost were the main sources of October's increase, Statscan said. Prices at the pump rose 13.5 per cent compared with the same month in 2006, mostly because of a drop in prices last year.
Mortgage interest cost inflation hit a 16-year high of 6.7 per cent, “more a reflection of increases in amounts borrowed because of higher new housing prices than of increases associated with the renewal of mortgage loans at higher rates,” the government agency said.
Higher property taxes also weighed on inflation, along with restaurant meals, which are rising amid higher minimum wages and rising dairy costs.
Among provinces, inflation remains high in Alberta, at 5 per cent. Higher gasoline prices also put pressure on the Atlantic provinces. In Quebec, Manitoba and B.C., however, annual consumer prices are running below 2 per cent.
The Canadian dollar was little changed Tuesday after sliding more than a cent a day earlier, trading at $1.0157 (U.S.). The U.S. dollar, meantime, slid to a fresh low against the euro and declined against the Swiss franc and the pound sterling, amid concern over the U.S. economy.
While the Canadian currency has weakened over the past week, it has still risen 18 per cent this year.
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