Canada's annual inflation rate dropped in November on lower gas prices but the closely watched core rate increased sharply in what some analysts said was a sign the Bank of Canada still had room to cut rates further. Statistics Canada said on Friday that the overall inflation rate had dropped to 2.0 percent in November from 2.6 percent in October as lower gas prices offset an increase in food and shelter costs.
The rate was the lowest since the 1.7 percent recorded in April 2008. Market operators had forecast the November rate at 1.6 percent. The closely watched core rate - which strips out the prices of gasoline and some food items - jumped to 2.4 percent from 1.7 percent in October, reflecting smaller price decreases for purchasing and leasing passenger vehicles.
"Inflation is, I think, the least of the concerns for central bankers. I think deflation is probably going to happen early in the new year in the United States," said Patricia Croft, chief economist, RBC Global Asset Management. "That's not the case in Canada (since) as we can see in this report the core inflation is still quite stable ... What it means is that the Bank of Canada certainly has scope to lower interest rates as we battle the oncoming recession."
The central bank last week cut its benchmark interest rate to three-quarters of a percentage point to 1.5 percent, the lowest it has been since 1958. But it also forecast that it saw core inflation - the measure of prices used to guide monetary policy - falling further than initially forecast.
"It is a bit of a shock how much core inflation went up. I don't think it's sustainable, but it does drive home the point that deflation is not a big risk for Canada any time soon," said Doug Porter, deputy chief economist at BMO Capital Markets. "What we're clearly seeing is the follow-through from the big weakening in the Canadian dollar in October landed with a thud in November's core inflation."
The core rate rose by 0.7 percent from October. The Canadian dollar slipped slightly and at 8:10 am (1310 GMT) was at C$1.2269, or 81.51 US cents, from C$1.2244, or 81.67 US cents, before the data was released. "In another environment this (the core) would have been real news. But with the current environment of downside spreads to global growth and continued concerns on deflation, (it) is probably not going to grab a lot of headlines," said Craig Wright, chief economist at the Royal Bank of Canada.
Statscan said the drop in the overall inflation rate was largely due to falling gasoline prices, which were 14.4 percent lower than in November 2007 and 21.4 percent lower than in October 2008. The month-on-month inflation rate fell by 0.3 percent. The drop in gas prices masked a jump in food prices, which rose 7.4 percent from November 2007 on higher commodity prices and the lower Canadian dollar. It was the ninth consecutive month that food prices had increased.