BUSINESS

Inflation dips in face of weak economic conditions in Canada, world

09/21/2012 08:41 EDT | Updated 11/21/2012 05:12 EST
OTTAWA - Canada's inflation rate continued to slide in August, dipping one-tenth of a point to 1.2 per cent in one of several signs Friday that the Canadian and global economies are slowing.

Statistics Canada also reported that wholesale prices in Canada fell 0.6 per cent in July, and the World Trade Organization released a new forecast slashing trade growth to a weak 2.5 per cent this year.

The inflation softness was anticipated by economists — they had expected price growth to remain unchanged at 1.3 per cent — but the falloff in wholesale sales was three times higher than consensus.

Several analysts called on the Bank of Canada to switch its tightening bias from higher interests rates. Even so, they said the likelihood of bank governor Mark Carney actually making good on his language by hiking borrowing costs in the near future was near zero.

"While slow growth and global economic risks nearly slayed the notion that the Bank of Canada would be hiking rates any time soon, today’s inflation report put a nail in the coffin," said CIBC.

The latest numbers, along with previously released data on manufacturing and housing starts, point to another disappointing quarter of growth in the July-September period, said CIBC chief economist Avery Shenfeld.

"We had hoped that because the second quarter had some distortions that held back growth, that we would see a bounce above two per cent in the third," he said.

"It looks like it will be once again below two per cent. Not a disastrous quarter, but a continuing of the very mediocre trend for Canada."

Earlier in the week, TD Bank projected the third quarter could see growth drop to as low as one per cent, from 1.8 in the first two quarters of the year, and half the Bank of Canada's forecast.

Capital Economics analyst David Madani said his reading is that inflation pressures in Canada will weaken in upcoming months, although food prices should start rising in response to crop failures from the summer drought in the U.S.

Given that outlook, the Bank of Canada should drop all pretence that it's looking to withdraw stimulus, he said.

"The economic slowdown underway in Canada, due to softening external demand and a slumping housing market, points to an increasing output gap and more disinflationary pressures," Madani said.

Low inflation is typical of a weak economy where retailers and producers face soft demand.

Core inflation, which measures underlying price pressure and excludes volatile items such as gasoline, fell one-tenth of a point to 1.6 per cent and was comfortably below the Bank of Canada's two per cent target.

Bank of Montreal economist Robert Kavcic noted the core inflation rate was the coolest pace in just over a year and down from a recent high of 2.3 per cent set in February.

On a month-to-month basis, prices rose slightly by 0.2 percentage points from July as gasoline prices rebounded by 2.7 per cent during the month. On a seasonally adjusted basis, prices rose more briskly at 0.4 per cent month-to-month.

That wasn't enough to push the annual rate higher, however, given that prices also rebounded last year at this time and increases on most goods and services were modest.

The more significant movers pushing the annual rate higher were gasoline, passenger vehicles, which on average cost two per cent more than a year ago, meat, up 5.7 per cent, and homeowner replacement costs, which increased by 2.2 per cent.

Food overall was 2.2 per cent higher, a slight increase from July, but showing no signs as yet of the major bounce expected later this year in response to the drought in the southern U.S. states.

But natural gas fell 13.9 per cent, video equipment by 15.6 per cent, women's clothing by 3.4 per cent, furniture was down 3.0 per cent, and mortgage interest costs were 1.8 per cent lower.

With a jump of 4.6 per cent in August, gasoline prices were strong enough to push up the annual inflation rate in Quebec by one-tenth to 2.0 per cent, the highest in Canada. The gasoline price jump in Quebec was more than twice the national average, the agency said.

On a regional basis, inflation was highest in Quebec and lowest in New Brunswick, Ontario, Alberta and British Columbia, which all recorded an annual rate of one per cent.