Start the conversation
By Mike Caggeso
Inflation slowed dramatically in Canada, with most of the deceleration credited to falling car prices and less upward pressure from gasoline prices.
Canada’s Consumer Price Index (CPI) increased by 1.8% in the 12-month period from February 2007 to February 2008, the slowest rate of growth in six months, Statistics Canada reported yesterday (Tuesday). It’s also a dramatic turn from the 12-month increase of 2.2% reported in January.
Excluding gasoline prices, CPI rose 1.1%, the smallest increase since March 2004.
Inflation is below the Bank of Canada’s 2% target, meaning the Bank of Canada has room to lower interest rates at its next meeting on April 22.
But even with inflation in check, Canada’s economy is facing a potential slowdown in the face of a possible U.S. recession. Already this month, the bank lowered its benchmark rate 50 points to 3.5%.
“Inflation is under control and that’s good news,” Stefane Marion, an economist with National Bank Financial in Montreal, told Bloomberg. “Inflation is not an impediment to rate cuts in Canada, contrary to other countries where central bankers might be more hesitant.”
Unlike most rate cut scenarios, Canada’s economy is operating above its production capacity and both core and total consumer price index (CPI) inflation are lower than projected in its Monetary Policy Report (MPR) in October.
In this case, the rate cut was primarily a precautionary move – putting up its economic dukes to fend off threats of [and reactions to] a possible U.S. recession.
“Financial market conditions have deteriorated since October, leading to a tightening of credit conditions in industrial countries. Given this, and a deeper, more prolonged decline in the U.S. residential housing sector, the 2008 outlook for the U.S. economy is now significantly weaker than at the time of the October MPR,” the bank said in January.
Domestic demand remains strong because of rising incomes and commodity prices, the bank said. But effects of a weaker U.S. economy will stunt Canada’s exports, and the bank projects that growth in 2008 will be weaker than it projected in October.
Canada’s Economic Challenges
However, consumer prices rose 0.4% between January and February, compared with a 0.2% decline in the previous month. The core index rose by 0.5% between January and February, following growth of 0.1% recorded in the previous period.
“For the Bank of Canada, what this suggests is the free ride of ever declining core inflation may be coming to an end,” Doug Porter, deputy chief economist at BMO Capital Markets, told Reuters. “But I would still say that Canada has got much less of an inflation problem than basically everywhere else in the world.”
In the, issued March 14, departing bank governor David Dodge outlined seven challenges facing the country and bank:
- The need for flexibility in the reallocation of economic resources in response to changing circumstances,
- Building stronger international monetary and financial order,
- Maintaining sustainable levels of public debt,
- Improving the efficiency and stability of the country’s financial system,
- Renewing outdated infrastructure in the most efficient and timely fashion,
- Fostering greater growth in productivity,
- Keeping inflation low.
The Bank of Canada also projected a first-quarter CPI of 1.7% and core inflation of 1.4%.
News and Related Story Links:
- Statistics Canada: Consumer Price Index: February 2008
- Bloomberg: Canada's Annual Inflation Rate Falls to Six-Month Low
- Reuters: Canada February inflation eases on lower car prices
- Bank of Canada: