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Inflation drops to 2.6 per cent

Canada's inflation rate dropped to just 2.6 per cent in October, with prices rising more slowly than the 3.4 per cent seen in September, Statistics Canada said Friday.

Falling car prices and cheaper women's clothing weighed on the consumer price index. Gasoline was still higher than a year ago, but was rising at a slower pace than in previous months, also bringing the annual inflation rate down, the agency said.

From a month earlier, prices actually fell outright, dropping 0.5 per cent on a seasonally adjusted basis.

Core inflation, which excludes the most volatile items such as energy and some food, was 1.7 per cent higher on the year – the same as in September, and close to analysts' expectations. On a month-over-month seasonally adjusted basis, core inflation showed no growth.

“This lower-than-expected report, with notable weakness in a variety of core components adding to the deep dive in gasoline, gives the all-clear signal to the Bank of Canada to continue cutting rates. Simple as that,” said Douglas Porter, deputy chief economist at BMO Nesbitt Burns Inc.

The central bank has already indicated that it intends to continue slashing its key interest rate in order to stimulate Canada's flagging economy.

After months of watching prices soar, analysts had been expecting much softer inflation numbers for October, and had also predicted a month-over-month decline. However, annual inflation at 2.6 per cent was far lower than the consensus forecast of 3.1 per cent.

Much of the inflation dynamic in October can be traced back to falling energy prices. Gasoline in October was 13.3 per cent than a year earlier, but that was half the increase seen in September, when pump prices were 26.5 per cent higher. On a month-over-month basis, gas dropped 13.4 per cent in October, Statscan said.

Excluding gasoline, the consumer price index rose 2.0 per cent from a year earlier, Statscan said. And excluding all energy prices, inflation was just 1.8 per cent. The Bank of Canada hopes to keep inflation around 2 per cent.

After gasoline, the biggest contributor to inflation in October was mortgage interest costs, Statscan said. Food prices also rose.

On the other side of the ledger, price declines were seen in the cost of cars, women's clothing and computer equipment.

The cost to buy or lease a car fell 9.0 per cent from a year earlier, the second straight month for a major drop. In September, car prices dropped 9.3 per cent, the largest decline since February 1956.

Women's clothing prices fell 5.8 per cent in October, from a year earlier, leading to the 10th month in a row for a decline in the clothing and footwear sub-index, Statscan said.

By province, inflationary pressure eased off in most regions. Only Manitoba and Saskatchewan did not see a slower pace of annual inflation in October. The greatest dip was in Prince Edward Island, where September's 5.5 per cent inflation rate dipped to 3.9 per cent in October. Ontario and Quebec saw the largest slowdown in gasoline price hikes.

Lower car prices were the biggest drag on inflation in all provinces, Statscan said.

With the United States slipping into recession and the global economy slowing rapidly, the widespread fear of rising inflation that dominated economic discourse in the spring and summer has quickly given way to expectations for disinflation and even warnings of outright deflation. Deflation, which is a broad and sustained decline in prices, is dangerous because consumers stop making purchases in the hopes of lower prices in the future – making recovery from a recession more difficult.

In Canada, however, talk of deflation has been muted. That's partly because the Canadian dollar has depreciated rapidly – a move that would normally drive up the price of imports, offsetting other prices that may be falling.

But with Friday's soft inflation numbers, economists at the Bank ofNova Scotia warned that deflation could be a problem here too.

“Consumer prices have started to fall in Canada as the economy heads into a recession, increasing the risk of deflation with a six-to-12 month lag over the U.S.,” they said in a note to clients. “The details show that almost every component in the consumer price index declined (not seasonally adjusted) in October, illustrating widespread discounting.”

Source: The Globe and Mail