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Core inflation drop could delay interest rate hike

Canada’s inflation remained tame and tepid in January even as spiking prices for commodities such as oil and food caused growing angst in many countries around the world.

OTTAWA — Canada’s inflation remained tame and tepid in January even as spiking prices for commodities such as oil and food caused growing angst in many countries around the world.

Consumer prices dipped one-tenth of a point year-over-year to 2.3 per cent in January, Statistics Canada reported Friday, which analysts said gives the Bank of Canada plenty of latitude to keep interest rates low for several more months.

The data-gathering agency did note that short-term inflation rose a relatively strong 0.3 per cent on a monthly basis — from December to January — where higher costs for gasoline and food exerted the most influence.

But most critical to the central bank’s next interest rate decision, to be released March 1, is that underlying core inflation — which excludes volatile items such as energy — slid lower to 1.4 per cent. That’s well below the central bank’s two per cent desired target and even lower than last year’s average of 1.7 per cent.

“Those calling for a spring (rate) hike by the Bank of Canada just got dealt another blow,” said Scotiabank economist Derek Holt.

“In fact, it would likely have to be shifting its bias toward being more hawkish.”

The central bank last raised interest rates in September 2010 and Holt says it could hold that line until as late as October this year — though many believe a hike could come earlier.

Those calling for monetary policy to be tightened sooner rather than later argue there’s a danger the correction, when it comes, will be sharper the longer the bank delays.

Driven by rocketing commodity prices such as oil and food, inflation has been accelerating in many countries, a factor that is partly blamed for recent unrest in the Middle East. There are also indications that commodity prices are pushing inflation up in Canada as well but, since energy and food comprise a smaller portion of the consumer spending pie, the overall impact on inflation is more muted.

The price of gasoline was 13 per cent higher last month than where it stood a year ago, and 3.5 per cent more than in December, Statistics Canada said.

Meanwhile, food price inflation remained moderate at 2.1 per cent from last year, although November and December saw monthly jumps of 0.5 and 0.8 per cent respectively, the agency said.

Bank of Montreal economist Sal Guatieri said he believes food price increases will continue in upcoming months, peaking at about four per cent annualized later this year.

“It’s meaningful, it will take a bite out of your pocket book, but it’s not on the order of escalating food costs in China and many other countries,” he said.

What makes food inflation less of an issue in developed countries is that it represents a much smaller portion of total consumer spending, particularly for lower income households.

Guatieri said the key restraints on prices in Canada remain an underperforming economy, which is keeping wage gains modest, and the strong loonie, which increases Canadians’ purchasing power.

Aside from gasoline and all its related components, other big movers in January were electricity, up 6.4 per cent, car insurance, rising by 4.8 per cent, restaurant meals, which rose 2.7 per cent, and home replacement costs, up 3.6 per cent.

Overall, seven of the eight major components tracked by the agency rose, while clothing and footwear fell 2.4 per cent.

Some individual items showed even greater drops, including computer equipment and supplies, down 10.1 per cent, video equipment, 10.8 per cent lower, and women’s clothing, which fell 7.2 per cent.

On a regional basis, Nova Scotia replaced Ontario as the province with the highest inflation rate at three per cent, to Ontario’s 2.9 per cent. Alberta continued to enjoy the most stable prices, with an inflation rate of one per cent.

The agency noted that Quebec’s inflation rate increased to 2.1 per cent from 1.6, which was probably attributable to the province hiking its sales tax by one point in January.