With inflation below 1 per cent, prospect of higher interest rates recedes

The Canadian Press
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OTTAWA — A major drop in the price of gasoline and declines in several other goods and services pushed down Canada’s inflation rate to 0.7 per cent last month, adding further justification to the Bank of Canada’s reluctance to raise interest rates any time soon.

October’s inflation rate was down four-tenths of a percentage point from September and the lowest level since May. On a monthly basis, overall prices in October were down 0.2 per cent from September. Both declines were twice as large as economists expected.

Analysts said the soft inflation reading supplied ample justification for the Bank of Canada’s decision last month to jettison a tightening bias on monetary policy which had been in place for 18 months.

At the time, governor Stephen Poloz explained that he was concerned about slack in the economy, a message he reinforced this week in saying he disagreed with an OECD opinion that Canadian interest rates might need to be raised as early as late 2014.

Many now don’t expect the Bank of Canada to raise its key short-term rate from a very low 1.0 per cent until mid-2015.

Bank of Montreal chief economist Doug Porter said October’s low inflation reading is worthy of attention, but added it’s too early to start worrying about actual deflation, a period of widespread price declines.

Deflation can be economically destructive. It increases the real level of debt held by firms and households at a time when profits and income are likely to be flat. As well, it could lead to consumers delaying purchases because they expect prices to fall further, pressuring producers to lower prices and wages.

Low risk

Porter said the risk of deflation is relatively low, but can’t be dismissed when the inflation rate is near one per cent.

“The concern would be if it starts to head even lower. Then we get too close to deflation for comfort and that can be a tough circle to get out of,” Porter said.

“If something else came along and hit the world economy, we could be stuck with real deflation.”

But at the moment, there are no signs that prices are headed lower on a sustained basis, particularly as wages are rising at close to two per cent annually and growth is also near two per cent.

As well, October’s big decline came primarily in the price of gasoline, which tends to fluctuate, sometimes widely.

A better measure of what is happening to consumer prices is core inflation — which excludes volatile items such as gas and fresh foods — and that only slipped one-tenth of a point to 1.2 per cent in October, still within the central bank’s broad one to three per cent sweet spot.

The overall inflation picture in Canada remains the tamest in years.

Consumer prices rose at a slower pace year-over-year in seven out of the 10 provinces, with British Columbia registering an outright decline of 0.3 per cent. As well, prices fell from last year in three of the eight major components the agency tracks — clothing and footwear (-0.7 per cent), transportation (-0.1) and health and personal care (-0.5).

Of the major items that saw price increases, food rose a meek 0.9 per cent and shelter costs rose only slightly more, by 1.3 per cent. Of the major components, only alcohol and tobacco rose above two per cent, and only slightly so at 2.3.

On a monthly basis, hotels, electricity and fresh vegetables were all lower than in September.

Organizations: Bank of Canada, OECD, Bank of Montreal

Geographic location: Canada, British Columbia

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