Canada's annual inflation rate dips to 2.4 per cent, bigger drop in offing

Julian Beltrame, THE CANADIAN PRESS
OTTAWA - Canada's inflation rate is in a downward spiral as the strong loonie and the impact of the one-point reduction in the GST start cutting into prices of consumer goods.

Statistics Canada said Friday that inflation slipped to 2.4 per cent on an annualized basis in December from 2.5 per cent the previous month, and the core index - which the Bank of Canada also uses to monitor inflation - fell a 10th of a point to 1.5 per cent, the lowest in two years.

And inflation is due to take a further downturn this month, the first month consumers will benefit from the reduction in the GST to five per cent, announced last October.

If the entire one-point drop is passed on to consumers, the GST effect will reduce prices across the board by about 0.6 per cent.

"This is good news for consumers because their purchasing power is going further," said Michael Gregory, an analyst with BMO Capital Markets.

"Although the Bank of Canada expects core inflation to average as low as 1.3 per cent year-over-year during the first half of this year, the double-whammy of the strong Canadian dollar and weak U.S. economy casts downside risk on this already very low inflation projection."

Friday morning, the Canadian dollar was up 0.3 of a cent at 99.69 cents after jumping 1.7 cents Thursday.

With inflation no longer on the radar screen, the central bank has been given more room to cut interest rates sharply in response to a weak economy or as a lever to control another surge in the loonie.

The currency's gains, while considered good for consumers, is causing havoc in the manufacturing and forestry sectors.

Bank of Canada governor David Dodge said Thursday that although he doesn't expect Canada to slip into recession, growth will be significantly curtailed this year, particularly in the first three months.

He said the economy is expected to grow at a meagre 0.6 per cent pace during the first quarter and at about 1.8 per cent for the year.

"Expectations of lower inflation and slower growth will keep the bank in rate-cut mode in the months ahead and we expect a 50-basis-point easing at the next fixed action date in March," said RBC senior economist Dawn Desjardins.

While gasoline prices, heating oil and mortgage costs continue to lead the way in pushing inflation up, the number of items applying the brakes keeps growing, with "reading material" showing up in a significant way for the first time in December.

Book and automobiles became the cause celebre last fall among critics who complained that retailers were not passing on the savings of the loonie rising to - and past - parity with the U.S. currency.

But Statistics Canada said prices for books and other reading materials fell nine per cent last month, from November, with the biggest savings coming in paperbacks.

Consumers also continued to realize dollar-related savings when purchasing or leasing automobiles, which cost 4.1 per cent this December and last year.

As well, computer equipment and supplies costs fell 13.7 per cent, fresh fruit dropped 7.2 per cent and fresh vegetables were 4.7 per cent less expensive last month than a year ago.

The biggest reason total inflation remained above two per cent in December was the cost of gasoline, which shot up by 14.9 per cent in the month over last year, after a 17.6 per cent rise in November. The higher pump prices coincided with a significant increase in crude oil prices on international markets.

Excluding higher gasoline prices - which account for 4.9 of the consumer price index basket - the all-items index rose only 1.7 per cent.

Meanwhile, mortgage interest costs rose 7.3 per cent in the month over last December. Home replacement costs rose 4.4 per cent, but the agency said this component has been falling since July, particularly in Alberta.

Consumers also paid 27.1 per cent more for heating oil in December, the biggest increase since October 2005.

For the full year, Statistics Canada said inflation averaged 2.2 per cent, slightly higher than the two per cent average over 12 months in 2006.

Here's what happened in the provinces and territories (previous month in brackets):

-Newfoundland and Labrador 2.3 (2.3)
-Prince Edward Island 2.8 (2.9)
-Nova Scotia 3.1 (2.8)
-New Brunswick 2.6 (3.2)
-Quebec 2.2 (2.0)
-Ontario 2.1 (2.4)
-Manitoba 2.0 (1.7)
-Saskatchewan 3.7 (4.0)
-Alberta 4.1 (4.7)
-British Columbia 1.2 (1.3)
-Whitehorse, Yukon 4.0 (4.1)
-Yellowknife, N.W.T. 3.2 (3.1)
-Iqaluit, Nunavut 2.8 (2.9)

The agency also released rates for major cities, but cautioned that figures may fluctuate widely because they are based on small statistical samples (revious month in brackets):

-St. John's, N.L., 2.5 (2.4)
-Charlottetown-Summerside, 2.9 (3.0)
-Halifax, 3.1 (2.8)
-Saint John, N.B., 2.7 (3.2)
-Quebec City, 2.2 (1.9)
-Montreal, 2.2 (1.8)
-Ottawa, 2.0 (2.2)
-Toronto, 2.4 (2.5)
-Thunder Bay, Ont., 1.4 (1.5)
-Winnipeg, 1.9 (1.6)
-Regina, 3.1 (3.5)
-Saskatoon, 4.9 (5.2)
-Edmonton, 4.5 (5.1)
-Calgary, 3.7 (4.3)
-Vancouver, 1.3 (1.4)
-Victoria, 0.6 (0.6)

© The Canadian Press, 2008