Canadian Consumer Price Inflation Fell to 2.6% in October from 3.4% in September

November 21, 2008

On-year CPI inflation of 3.4% in both September and 3Q08 gave way to a 2.6% in October, as the seasonally adjusted index fell 0.5% and the unadjusted index tumbled by 1.0% in month-on-month terms. In the three months between July and October, the so-called headline (all items) CPI slid 1.4% at a seasonally adjusted annual rate. Gasoline prices dropped 13.4% between September and October and posted a sharply lower 12-month gain of 13.3% after jumping 26.5% in the year to September. Non-energy consumer prices increased 1.8% from October 2007, down from a 1.9% pace in September. For a third consecutive month, core CPIX, which excludes the eight most volatile CPI components, posted a year-over-year rise of 1.7%, which is below the central bank target of 2.0%. In its semi-annual Monetary Policy Report released last month, Bank of Canada officials projected core inflation of 1.7% in the first half of 2009, 1.6% in the second half of the year, and 1.9% in 2010.

This disinflationary environment illustrates why in recessionary periods like the present, currency weakness is preferred to currency strength. It is hard to pass on any boost to import costs from depreciation, so the typical lift to inflation and constraint on monetary policy easing does not occur. Canadian officials have halved their target rate to 2.25% since December and are likely to ease another 50 bps on December 9th. At the same time, export competitiveness benefits. the Canadian dollar has declined 29.2% since peaking a year ago at US$0.9061. One area of resilient inflation continues to be food, whose cost advanced 0.4% m/m in October and by 6.1% from a year earlier compared to a 5.6% rise in the year to September.



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