Inflation exceeds forecast, consumer prices rise 1.1 per cent

Chronically weak inflation is Bank of Canada's biggest headache
By Louise Egan
|payroll-reporter.com|Last Updated: 03/21/2014

OTTAWA (Reuters) — Canada's inflation rate slowed in February but stayed within the central bank's comfort zone, news that may reassure policymakers somewhat but is unlikely to trigger a change in their neutral stance on interest rates.

Consumer prices rose 1.1 per cent in the year to February, down from a one-and-a-half year high of 1.5 per cent in January but above the market forecast of a 0.9 per cent increase, Statistics Canada data showed on Friday. Lower gasoline prices partially offset higher shelter and food costs in February, it said.

Core inflation, a gauge of underlying price trends, was also a notch above expectations at 1.2 percent but down from 1.4 percent in January.

Statscan also reported that retail sales bounced back in January after being hit by severe weather in December, growing at the fastest pace since May, at 1.3 per cent. The volume of sales was up by a healthy 1.4 per cent.

Chronically weak inflation is the Bank of Canada's biggest headache at the moment and is the reason it dropped a rate-increase bias last year. The bank aims to keep inflation at 2 per cent, within a range of one per cent to three per cent. The rate has been below two per cent for 22 months.

The latest data will put to rest any lingering speculation that the bank may cut rates this year, said Benjamin Tal, senior economist at CIBC World Markets.

"So what we got now is actually very good news in the sense that nobody now is even dreaming about the Bank of Canada cutting interest rates," he said.

"And that is exactly what the Bank of Canada wanted to see, suggesting this fear of disinflation that the bank was referring to was exaggerated and a lot of it was actually noise," he said.

Bank of Canada Governor Stephen Poloz said on Tuesday he expected lower February inflation because of the effects of a sharp pickup in prices in the same month of 2013.

"Looking through the short-term volatility, inflation still seems to be running at around 1.2 per cent, give or take a tenth or two," he said.

He reiterated the bank's intention to continue a freeze on interest rates that has lasted more than three years, saying he could not rule out a rate cut but was not leaning in any particular direction either.

Analysts surveyed by Reuters forecast no move on rates until an increase in the third quarter of 2015, but traders had been pricing in a small chance of rate cuts later this year. Those bets were scaled back after the inflation data was released .

GASOLINE AND SHELTER

Gasoline prices rose 8.4 per cent in February 2013 but only by 2.3 per cent this year.

In the year, gasoline prices fell 1.3 per cent following a 4.6 per cent increase in January.

Canadians paid 2.2 per cent more for shelter than they did a year earlier as electricity, property taxes and rent went up. Food cost 1.1 per cent more, led by fresh fruit and meat, and transportation costs climbed 0.4 per cent.

On a monthly basis, the consumer price index rose 0.8 per cent and core CPI increased 0.7 per cent.

The news of strong retail sales in January was welcomed as a sign the Canadian consumer is still an engine of growth.

As with inflation, economists see the number as broadly in line with the bank's outlook, although the bank has been calling for businesses and exporters to assume a greater role in driving growth.

"It's a good number, but that number alone is not going to deter their broader view on the economy," said Andrew Kelvin, strategist at TD Securities.

In January, six subsectors rebounded from lower sales in December, led by motor vehicle and parts dealers and building material and garden equipment supplies stores.

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