Canadian inflation rate slows - Lower vehicle prices, GST cut counter higher fuel prices     -        Published Wednesday, February 20, 2008

OTTAWA -- Canada's inflation rate slowed to a five-month low in January, thanks to the one-percentage-point cut in the goods and services tax that took effect at the start of the year and a drop in vehicle prices that offset higher gasoline costs.

The weaker rise in consumer prices, though expected by most economists, keeps the door open for further interest rate cuts by the Bank of Canada to help bolster the economy against a possible recession in the United States. Statistics Canada said Tuesday that prices rose at an annual rate of 2.2 per cent last month, down slightly from the 2.4 per cent growth seen in December.

"For the fifth straight month, growth in the all-items index was due mainly to the 12-month rise in gasoline prices and mortgage interest cost," it said.

In January, the federal government cut the GST to five per cent from six per cent.

"The upward pressure on the all-items index of these two components was mitigated, to some extent, by the one-percentage-point reduction in the goods and services tax that took effect in January, and by the reduction in motor vehicle prices."

The yearly change in the core index -- which strips out less stable items such as food and energy costs, and is used by the Bank of Canada to measure its inflation target -- came in at 1.4 per cent, the smallest gain since July 2005. On a monthly basis, prices fell 0.2 per cent between December and January, reversing the 0.1 per cent jump between November and December. The January downturn was driven mainly by seasonal declines in prices for tour packages and plane tickets.

The monthly increase in the core index was 0.1 per cent, compared with a 0.3 per cent decline in December. This shift was due in part to a drop in women's clothing prices of only 0.4 per cent in January, versus 4.7 per cent in December, Statistics Canada said.

"Today's report offers no big surprises, and continues to show that the Canadian dollar is weighing heavily on underlying inflation trends, keeping it well below U.S. levels," said BMO Capital Markets deputy chief economist Douglas Porter. "On balance, there's not much here to make a big impact on the near-term (Bank of Canada) policy outlook."

Gasoline prices rose at a yearly pace of 21 per cent in January -- compared with 15 per cent in December -- although Statistics Canada said that largely reflected steep declines at the beginning of last year.

"Overall, Canadian inflation is still looking pretty soft, despite the upward pressure in January from food and gasoline prices," said Jacqui Douglas, economics strategist at TD Securities

"Therefore, the continuing softness in core CPI will give the Bank of Canada plenty of room to cut interest rates further," Douglas said, adding that the bank will likely cut its key lending rate by half a percentage point at its March 4 meeting.

Last month, the central bank cut its lending rate by a quarter point to four per cent. Bank of Canada governor Mark Carney, in a speech Monday in Vancouver, restated his commitment to trimming interest rates.

BY THE NUMBERS

Annual percentage rate of inflation in January (by province/territory):

Newfoundland and Labrador +2.1
Prince Edward Island +2.4
Nova Scotia +3.1
New Brunswick +2.3
Quebec +2
Ontario +2.1
Manitoba +1.6
Saskatchewan +3.2
Alberta +3.6
British Columbia +0.8
Whitehorse +3.2
Yellowknife +2.2

© The Vancouver Sun 2008