Canada December Inflation: Gas, Food, Car Prices Plunge, Rate Falls To 2.3 Per Cent

Canada Inflation December 2011

First Posted: 01/20/12 07:06 AM ET Updated: 01/20/12 12:05 PM ET

OTTAWA - A combination of Christmas sales and falling gasoline and food prices contributed to one of the biggest one-month drop in consumer prices in years in December, Statistics Canada said Friday.

The 0.6 per cent overall decline in prices from November slashed the annual inflation rate by a similar amount to 2.3 per cent.

The one-month decline was the steepest since the summer of 2009, when the country was in recession.

Analysts had expected prices to cool due to Christmas season sales, but the consensus was for a 2.7 per cent inflation rate in December.

"Suffice it to say that this low result was a surprise," said deputy chief economist Douglas Porter of BMO Capital Markets.

"The question now is whether this is maintained. We suspect it will be a one-month wonder and prices will nudge back up next month."

But it was only the scale of the decrease that was surprising, not the trend. The Bank of Canada this week predicted annual inflation would fall to about 1.5 per cent by summer.

December's dramatic drop in prices will give comfort to the central bank's governor, Mark Carney, that his unruffled view of inflation pressures — expressed again this week when he kept historically low short-term interest rates unchanged — remains solidly based on the data.

But the result was not positive for the loonie since it also creates added flexibility for Carney to cut rates if he so chooses.

The dollar was down 0.22 of a cent at 98.67 cents US in late-morning trading Friday.

Capital Economics analyst David Madani, who believes the central bank is too optimistic about the economy this year, found more fuel for his minority opinion that the next move by Carney will be to cut rates to further stimulate borrowing and spending.

"As further declines in underlying inflation coincide with slower economic growth and rising unemployment in the first half of this year, we will see the Bank of Canada eventually cutting its policy interest rate," he said in a note.

As expected, pump prices saw the steepest drop, with the year-over-year growth falling to 7.6 per cent from 13.5 per cent in November as the cost of filling up fell three per cent in one month.

"Gas prices have declined steadily on a monthly basis since June," the federal statistical agency noted.

Other major items that go into the inflation index also fell in December. Food inflation dipped from 4.8 per cent in November to 4.4 per cent in December, although staples such as meat, bread and fresh vegetables saw bigger increases.

Purchasing a car was also less expensive in December, by 2.3 per cent, as manufacturers continued to offer discounts, including on new 2012 models, the agency said.

Another dramatic cut was in clothing. Stores dropped prices 5.1 per cent after a 4.7 per cent trim in November for the biggest two-month discount on record in an attempt to lure unusually hesitant Christmas shoppers.

Overall, the agency said prices declined in five of the eight major components it tracks, bringing the inflation rate for 2011 as a whole to 2.9 per cent, just within the Bank of Canada's broad one to three per cent range. Still it was the highest average rate in several years.

The central bank's core index, which excludes volatile items such as gasoline and some foods, dipped below the two per cent target to 1.9 per cent.

Items that saw a price increase from November included electricity, fresh vegetables and fruit, homeowner replacement costs and financial services, although the gains on average tended to be modest.

Regionally, prices rose at a slower rate in every province except Prince Edward Island last month. New Brunswick posted the highest annual rate of price inflation at 3.3 per cent, while British Columbia was the lowest, at 1.7 per cent.

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  • What Is Inflation?

    Inflation refers to the increasing price of goods and services that ultimately decreases a nation's purchasing power. As the cost of living increases, each unit of currency buys less. The result is a decrease in the value of a nation's currency.

  • Measuring Inflation

    Inflation is measured by Statistics Canada using the Consumer Price Index (CPI). The cost of a fixed "basket" of goods and services purchased by typical consumers is tracked over time. About 650,000 prices are checked each year across Canada.

  • Inflation Rate

    The number that determines the rate of change of prices (usually calculated monthly or annually) is the rate of inflation. The core rate of inflation excludes the most volatile items in the CPI basket, such as gasoline, vegetables, and tobacco.

  • International Lending And Exchange Rates

    As nations borrow money from each other, prices can rise as a response to interest and national debt. Inflation can also occur when a currency's exchange rate plunges, causing imports to spike in price.

  • The Money Supply

    Widely considered a long-term cause for inflation is the amount of money in circulation. However, there is disagreement among economists as to how the money supply affects inflation. Many say that as governments print excesses of money to cope with crises (for example, to revive an economic recession), prices increase dramatically. But others argue the recent economic crisis, which resulted in the printing of money but little inflation, disproves that theory.

  • Production And Labour Costs

    Production and labour costs are factors contributing to inflation. If the raw materials for a product increase in price, so does the price of the final product. Similarly, a rising cost of living causes workers to demand increased wages--costs that are passed on to the consumer.

  • Deflation

    When prices fall, what occurs is the opposite of inflation: deflation. This is typically considered dangerous because lower prices can correspond with lower demand, leading to a deflationary spiral. Depressions are linked to deflation, but deflation itself doesn't always symbolize a bad economy. For example, more efficient production can result in price deflation, but that doesn't indicate a shrinking economy.

  • Hyperinflation

    Fast economic growth is not always beneficial because it can lead to hyperinflation--a cycle of rapidly rising prices. When there is a drastic increase in the money supply without a corresponding increase in demand, the value of each unit of currency diminishes. In the picture above, a woman protests hyperinflation by carrying around worthless notes in Serbia during its hyperinflation crisis in 1992.

  • Controlling Inflation

    The Bank of Canada employs interest rates to maintain a target inflation rate. The bank can raise interest rates when inflation is too high, or lower them when it's too low. With high interest rates, demand typically decreases for certain goods and services as they become harder to finance.

  • Other Methods Of Control

    In an attempt to control inflation, Prime Minister Pierre Trudeau's government introduced the Anti-inflation Board (AIB) in 1975. It was the board's responsibility to supervise and control wages and prices, and was part of a 1970s trend -- followed even by U.S. President Richard Nixon -- that saw politicians attempt to legislate away inflation. Canada's program was phased out in 1978, and most Western countries abandoned price controls after finding them largely ineffective.

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Filed by Daniel Tencer  |