News: Deflation threat still distant in October

By Jamie Sturgeon | Financial Post | 11. 23. 08

The rate of inflation cooled to 2.6% in October as a slowing economy put the brakes on gasoline and other consumer prices, Statistics Canada reported on Friday.

Economists had expected a slowdown from September's clip of 3.4% as the financial crisis moved into the broader economy, however, the drop is sharper than expected, with notable slowing in a variety of core components.

Price declines for vehicles, clothing and computer equipment as well as a slowdown in transportation costs all contributed to an actual fall of 0.5% in consumer prices last month on a seasonally adjusted basis.

Prices at the pumps, however, were the biggest drag on inflation, "easing" to just 13% higher than a year ago, compared with a 27% rise in the cost of gas in September, the federal agency said.

Excluding gasoline, consumer prices rose 2% year-over-year in October. Excluding all energy components in the index, prices advanced 1.8%.

The core inflation rate, which excludes consumer segments subject to erratic price behaviour such as energy and is the metric used by the Bank of Canada to help determine the overnight interest rate, advanced 1.7%, identical to September. On a seasonally adjusted basis, core inflation posted no growth last month.

The lower-than-expected report "gives the all-clear signal to the Bank of Canada to continue cutting rate," said Douglas Porter, deputy chief economist at BMO Capital Markets in a morning commentary.

The Bank of Canada, which has stated it would cut interest rates further to boost the flow of credit, is set to review the key rate, currently at 2.25%, on Dec. 9.

Beyond falling energy prices, the cost of buying or leasing a vehicle fell by 9% for the second straight month. The clothing and footwear component declined 2.8% from a year ago, led by a sharp decline in women's clothing prices, Statscan said.

Food prices continued to exert upward pressure on inflation though, as the average price for groceries was 7.3% more expensive than last October, marking the eighth straight month food prices have gained. Mortgage interest costs also increased.

By province, Manitoba and Saskatchewan were the only two provinces to not report a slowdown. P.E.I. experiencing the biggest decline, to 3.9% from 5.5% in September.

October's results could mark a pivotal point. As the national economy braces for recession and demand for energy abates, some say inflation will continue to fall sharply in the remaining two months of the year.

"Inflation is poised to plunge again next month, as gasoline prices have dropped in the double-digits again this month - probably down about 18% - which alone could take the annual inflation rate well below 2%," said Mr. Porter.

The central bank's targeted inflation rate is 2%.

Some have even warned of a period of deflation in the coming months as developed economies slow rapidly. However, the threat of deflation, or a self-reinforcing period of falling prices combined with limited consumer spending, here in Canada is distant at best, said Avery Shenfield, economist at CIBC World Markets.

"It’s hard to even think about a wage [and] price tumble when average hourly earnings have still been rising at a 4% clip, the employment rate is still close to record highs, and when a weaker [Canadian dollar] promises to offset some of the drop in global prices for goods set in U.S. dollars."