Canada Consumer Prices Fall for Fourth Month on Autos

By Greg Quinn

Feb. 20 (Bloomberg) -- Canadian consumer prices fell a fourth consecutive month in January, the longest stretch since the Great Depression, led by reduced costs for natural gas and motor vehicles.

The consumer price index fell a more-than-expected 0.3 percent from December, as natural gas declined 6 percent and automobiles were down 5.3 percent, Statistics Canada said today in Ottawa. The year-over-year inflation rate slowed to 1.1 percent, the least in two years, from 1.2 percent in December. Annual inflation peaked at 3.5 percent in August 2008.

“We are in a deep recession, inflation should continue to fall,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. “It’s clear annual inflation will turn negative fairly soon, it’s a question of whether we see a broader decline in prices.”

Bank of Canada Governor Mark Carney says the annual inflation rate will fall below zero in the second and third quarters on a drop in energy prices. The bank sets interest rates to keep inflation between 1 percent and 3 percent. Carney has said he may cut borrowing costs again if needed to ease a recession and bring inflation back to the target range within two years.

Core Inflation

Economists surveyed by Bloomberg predicted the monthly inflation rate would fall 0.2 percent, and the year-on-year pace would stay at 1.2 percent. The last time monthly prices fell for four straight months or more was from December 1930 to July 1931.

The Canadian currency weakened 0.4 percent to C$1.2637 per U.S. dollar at 8:17 a.m. in Toronto, from C$1.2580 yesterday.

Inflation excluding gasoline and seven other volatile items, the so-called core rate, slowed to 1.9 percent in January from December’s 2.4 percent pace. On a monthly basis, core prices fell 0.4 percent. Economists predicted core prices would advance 2.2 percent from a year earlier and fall 0.1 percent on a monthly basis.

Bond investors are predicting long-term inflation below 2 percent. The gap between yields on regular 15-year government bonds and securities that are protected against inflation was 1.56 percentage points today.

The central bank forecasts prices will decline by 0.6 percent in the second quarter and 1 percent in the third. Inflation won’t return to the bank’s 2 percent target until the first half of 2011, giving policy makers room for more cuts in borrowing costs.

Remote Chance

Consumer prices haven’t fallen for two straight quarters since 1953, according to Statistics Canada figures.

Carney said in a Jan. 27 speech deflation is a “remote” possibility, and more than half of the items in the consumer price index are rising faster than 2 percent. Carney, who cut the key interest rate to 1 percent on Jan. 20, the lowest since the central bank was founded in 1934, also says he has “considerable flexibility” to take further action to keep inflation close to target.

Deflation can freeze spending by business and consumers if they hold off on purchases in anticipation of ever-lower prices. Reversing deflation can be harder than inflation because central banks can only cut interest rates so low to encourage demand.

The Bank of Canada will probably cut the rate to 0.5 percent at the next decision on March 3, Charmaine Buskas, senior economics strategist at TD Securities in Toronto, wrote in a note to clients.

To contact the reporter on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net.