UPDATE 3-Canada inflation data shows price pressures constrained

by on November 23, 2012 4:22 pm BST

Fri Nov 23, 2012 11:22am EST

* 12-month rise in gasoline and electricity prices slows

* Prices up in all CPI components except clothing, footwear

* Core inflation unchanged from September at 1.3 pct

* Bank of Canada to stay on sidelines, economic analysts say

By Louise Egan

OTTAWA, Nov 23 (Reuters) – Canadian inflation was slightly
stronger than expected in October as prices rose for almost all
consumer items, but the rate remained well below the central
bank’s 2 percent target, suggesting interest rate hikes are
still a long way off.

Inflation has remained at, or below, the Bank of Canada’s 2
percent target for eight consecutive months, according to
Statistics Canada data on Friday.

The consumer price index rose 1.2 percent in October
year-on-year, while the core inflation rate, which excludes
prices for gasoline and other volatile items, was up 1.3
percent. Compared with September, the gauges rose 0.2 percent
and 0.3 percent, respectively.

The annual rates were unchanged from September but slightly
above forecasts of 1.1 percent and 1.2 percent inflation by
market players in a Reuters poll.

The lack of inflationary pressure means Bank of Canada
Governor Mark Carney has no reason to raise rates soon. He is
the only central bank chief in the world’s major industrialized
economies to talk about hiking rates, a move that would be made
to prevent inflation from overshooting the bank’s inflation
target in the medium term.

“It doesn’t really change the story – it’s really limited
inflation pressure in Canada,” said Sal Guatieri, senior
economist at BMO Capital Markets.

“Both measures, headline and core, are running a bit below
the Bank of Canada’s estimates for the fourth quarter, so it may
need to revise down its inflation outlook again,” he said.

The central bank’s projections show inflation averaging 1.5
percent in the fourth quarter and a core rate of 1.6 percent in
the same period, returning to the desired 2 percent by the
second half of next year.

Carney has signaled since April that he may need to withdraw
monetary stimulus as the domestic economy expands despite the
global headwinds. Last month, he softened his hawkish tone
somewhat to say rate hikes were “less imminent” and would happen
over time, but his central message remains that rates will go
up, not down.

“Certainly (there is) no pressure on that front to move
rates higher and the bank can keep policy highly accommodative
to generate a bit more momentum in terms of growth,” said Paul
Ferley, assistant chief economist at Royal Bank of Canada.

Canada’s primary securities dealers expect the bank to begin
tightening monetary policy in the fourth quarter of next year,
according to a Reuters poll last month.

But markets are more bearish. Overnight index swaps, which
trade based on expectations for the central bank’s key policy
rate, showed that after the data on Friday traders are pricing
in only a small chance of a rate hike in late 2013.

The Canadian dollar strengthened to C$0.9956 to the
U.S. dollar, or $1.0044, from C$0.9972, or $1.0028, at
Thursday’s North American close.

Gasoline and electricity prices rose at a slower
year-on-year pace than in September, while prices for food, air
travel and property taxes rose more sharply, Statistics Canada

Prices rose in all major components except clothing and

But energy prices helped keep inflation low as gas prices
rose 4 percent in the year to October, easing from 4.7 percent
in September. Electricity price gains slowed to 1.7 percent
year-on-year from 6 percent. Natural gas fell 11.6 percent after
decreasing 14.2 percent in the previous month.

Upward pressure on inflation came from food prices, which
jumped 2 percent from a year earlier compared with 1.6 percent
in September versus September 2011. Year-on-year price growth
also sped up for air travel and property taxes.