Canada's Headline Inflation Rate Falls to 1.1%; Bank of Canada's Core Tumbles to 1.9%

Daily Forex Fundamentals | Written by RBC Financial Group | Feb 20 09 14:25 GMT |

Canadian consumer prices slid 0.3% in January, slightly more than the forecasted 0.2% dip. The year-over-year rate edged down to 1.1% from 1.2% in December. The seasonally adjusted index fell 0.1%. The Bank of Canada's core measure, which eliminates the impact of eight volatile series plus indirect taxes, fell 0.4%, more than the expected 0.1% on a not seasonally adjusted basis (and fell by 0.3% on a seasonally adjusted basis). The year-over-year core rate slipped to 1.9%. The decline in the monthly all-items CPI index in January reflected a sharp decline in the prices to purchase or lease passenger vehicles. This component has been extremely volatile in recent months with January's 5.3% drop largely working to reverse the unexpectedly sharp 7% jump in November with prices moving only slightly in December. Travel tour prices and natural gas prices were also lower in the month. Moderating the impact of these declines was an as-expected 5% rise in gasoline prices. The sharp movements in the motor vehicle prices appear to have swamped the impact of the January 2008 cut in the GST, which fell out of the year-over-year calculations and we expected would result in the headline CPI index rising in January. Relative to a year earlier, prices for gasoline remain the major negative contributor as they were 23.5% lower than in January 2008. The purchase/lease price for autos also exerted downward pressure on the index with the rate of decline picking up significantly in January to 8.2% from December's 3.5% decrease. Other fuel prices were also lower than a year earlier. Once again it was higher mortgage interest costs, which were up 5.8% from January 2008, fresh vegetables prices (+19.9%) and natural gas prices (+12.8%) which exerted upward pressure on the annual increase in the headline CPI. Notably the pace of increase in these three components was slower than in December. The core rate fell more than expected in January due to the sharp decline in auto prices which, as indicated above, reversed much of the November's unexpected increase. Recent data on Canada's economy have been dismal highlighted by slumping manufacturing and wholesale sales, a record month of job cutting and housing starts falling to their lowest level since 2001. In all, these data signal that the economy slipped into recession in late 2008 and continued to contract in early 2009. RBC forecasts that real GDP contracted at a 3.1% annualized rate in the fourth quarter and will fall by 2.8% in the first quarter. This sub-standard performance will increase the amount of slack in the economy and lead to an easing in core prices in the months ahead, which together with year-over-year declines in energy prices will likely see the all-items inflation rate drop significantly and tip into negative territory mid-year. With the economy in recession and risks to inflation to the downside relative to the Bank's target we expect that the Bank of Canada to lower the overnight rate again on March 3 to 0.50% from the current 1% as policymakers aim to contain the slide in the economy and return the inflation rate to the 2% target over the medium-term. RBC Financial Group http://www.rbc.com The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.