OTTAWA (AP) — Canada's inflation rate continued its downward slide in January, dropping 0.2 percentage point to 2.2 percent and giving the Bank of Canada more room to cut interest rates next month.
Statistics Canada said Tuesday the year-over-year rise in the consumer price index was the smallest since August, largely as a result of the stronger Canadian dollar and the one-percentage-point drop in the federal goods and services tax on Jan. 1.
Core inflation, excluding volatile food and energy prices, declined for the seventh straight month to 1.4 percent, from 1.5 percent in December.
The Canadian dollar was down 0.26 cent to 98.98 cents U.S. at midmorning, as the slowing pace of inflation gives the central bank more reasons to cut interest rates to stimulate the economy, something new governor Mark Carney suggested Monday was uppermost in the bank's thinking.
The big question is not if rates will come down, but by how much.
''We continue to look for a 50-basis-point cut by the Bank of Canada on March 4,'' said Scotiabank economist Karen Cordes.
But Douglas Porter of the Bank of Montreal said the bank may continue to go slow on rate reductions. He forecasts a 25-basis-point drop to 3.75 percent next month.
''It's a close call and frankly I can see the other arguments,'' he said. ''The manufacturing numbers and exports were very weak last week, but the job market is still quite healthy and wage pressures are rising meaningfully. There's still a lot of inflationary pressures out there.''
For the fifth straight month, gasoline prices and, to a lesser extent, mortgage interest costs were the key drivers of inflationary pressure.
Gas-pump prices jumped by 20.9 percent on an annual basis, while heating oil and other fuels soared 24.7 percent.
Mortgage interest costs rose 7.6 percent from a year ago, while home prices rose 4.5 percent.
Prices for services rose 3.3 percent in January over last year, slightly lower than the annual rate of 3.5 percent recorded in December.
But many other items saw price drops as a result of a combination of seasonal factors, the cut in the GST and the import-price benefit of the high Canadian dollar.
Vehicles were 4.9 percent cheaper than in January 2007, computer prices crashed 16.7 percent, women's clothing dropped 4.5 percent, vacation packages were down 10.3 percent, air transportation fell 4.6 percent and the cost of men's clothing dropped by 3.4 percent.
''Substantial decreases (in vehicle prices) have been observed in the past three months, owing to the combined impact of the reduction in the GST and discounts by manufacturers on new models,'' the agency said.
''This continuation of incentives came at a time when the Canadian dollar compared favourably to its U.S. counterpart.''
The agency said the GST cut would lower retail prices by about 0.6 percent if the entire amount is passed on to consumers, although the impact may be less if businesses raise their profit margins or had already reduced prices in anticipation of the GST reduction.
Slowing inflationary pressure is being felt in the hot economies of Western Canada, the agency said.
Consumer prices rose 3.6 percent in Alberta last month on an annual basis, down from 4.1 percent in December. In British Columbia, inflation was just 0.8 percent, the slowest rate in six years.
