Canada: Inflation Falls to 1.2% in December

Daily Forex Fundamentals | Written by TD Bank Financial Group | Jan 23 09 14:55 GMT |

Al items inflation plummets to 1.2% from 2.0% in November on falling gasoline prices Core price steady at 2.4% Canadian consumer price inflation continued to mellow in December on the back of falling gasoline prices, dropping to 1.2% from 2.0% in November. Core consumer price inflation remained steady at 2.4%. The perseverance in the core rate is more reflective of the strong downward pressure on core prices one year ago, rather than any signal of renewed price pressures today. Still, it is stunning just how quickly things can change on the inflation front and a far cry from the situation in mid-2008 when rising food and energy prices were pushing headline inflation away from core in a major way. It is always a good idea to look at the sources of the price pressure in forming expectations of future price growth. Earlier in the year, our belief that energy prices had gotten ahead of underlying fundamentals formed our belief that the rise in headline inflation would likely be relatively short lived. Similarly, in the current environment core inflation has been pushed up by the elimination of price incentives on motor-vehicles in late 2008 (which, once again, calls to mind the impact of the Canadian dollar at parity with the U.S. in late 2007). But this is a short lived phenomenon. Motor vehicle sales plummeted in Canada at the end of 2008 as demand waned and if anything a return to incentive pricing can be expected. Regionally, consumer prices trended down across the country, no more so than in the Atlantic region. Year-over-year inflation actually turned negative in New Brunswick (-0.6%) and Nova Scotia (-0.2%), while in PEI the rate stood at an even 0.0%. But even Alberta, at 1.9%, has seen the core rate come below 2.0%. Only Saskatchewan, at 2.6% remains above the 2.0% level and even here prices are clearly on a downward trend. As yesterday's Monetary Policy Report Update from the Bank of Canada (BoC) noted, the hefty build up of slack as the Canadian economy enters recession will continue to put downward pressure on inflation in Canada over the next year. In fact, it is only with a very strong and relatively quick rebound in economic growth in 2010 that inflation returns to the banks target rate of 2.0% in 2011 (the BoC expects economic growth of 3.8% compared to TD's forecast of 2.4%). What is equally important in determining the actual path of inflation, is inflation expectations and recent signs, such as the spread on inflation adjusted bonds, show that if anything getting back to target may take longer than the central bank anticipates. Given the stresses on the Canadian economy from falling household wealth and more moderate personal income growth, and the external pressure on exporters during the global economic recession, inflation is likely to come in below the Bank of Canada's expectations, prompting one more half percentage point rate cut in March. TD Bank Financial Group The information contained in this report has been prepared for the information of our customers by TD Bank Financial Group. The information has been drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does TD Bank Financial Group assume any responsibility or liability.