01/20/2012 07:06 EST | Updated 03/21/2012 05:12 EDT

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


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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