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Slower Rise in Gasoline Prices Holds Annual Inflation Rate to Two Per Cent

Posted on: Tuesday, 20 December 2005, 15:00 CST

By SANDRA CORDON

OTTAWA (CP) - Cheaper gasoline at the pumps helped reduce the annual inflation rate to two per cent in November but analysts say that won't keep the Bank of Canada from raising interest rates in the coming year.

Inflation softened last month from October's 2.6 per cent rate as gasoline prices came down from peaks hit last fall after hurricane Katrina threatened energy production in the southern United States.

Prices at the gas pump were still 9.4 per cent higher in November compared with one year earlier, Statistics Canada noted Tuesday in releasing the last consumer price increase.

But that's a more modest increase in gasoline prices than the 17 per cent annualized jump reported in October.

On a month-over-month comparison, gas prices fell by 11.2 per cent in November from October.

Despite the slower pace of inflation, analysts said the Bank of Canada will continue to gradually increase its key policy interest rate to keep a lid on inflation.

"They can't exactly sit back and relax. . . they have to make sure rates get back to more neutral levels," of around four per cent, Marc Levesque, chief fixed income strategist at TD Securities, said in an interview.

"It does not suggest the bank has a truckload of wiggle room."

The central bank has raised its trend-setting overnight interest rate three times in recent months, to 3.25 per cent, to keep inflation from taking off.

And it has hinted more rate increases as a pre-emptive strike against inflation, as the economy shows healthy rates of growth and essentially full employment.

Canada's unemployment rate dropped to just 6.4 per cent for December, a three-decade low. And GDP growth averaged a whopping 3.6 per cent in the third quarter, higher than expected.

Still, analysts say that's no reason for the central bank to panic and push rates up quickly.

The core rate of inflation - which central bankers closely track - slipped a bit last month to 1.6 per cent from 1.7 per cent in October, resting at the low end of the Bank of Canada's target range of one to three per cent for the core rate.

That's roughly what the central bank expected for core inflation, which excludes volatile food and energy prices.

The loonie slipped Tuesday on market fears the Bank of Canada might not raise rates as quickly as previously thought.

By mid-day, it was trading at 85.73 cents US, down 0.25 of a cent from Monday's close.

The central bank will want to keep a close eye on inflation as a booming Western Canadian economy threatens to push up price pressures, said Warren Lovely, senior economist with CIBC World Markets.

However, they shouldn't be too worried, given the offset created by slower growth in Ontario and Quebec's manufacturing sector, he added.

"With growth in central Canada stuck well below potential, the overall track for. . . core inflation should remain subdued," said Lovely.

Adding to inflation pressures last month was the price of natural gas - which jumped by 18.7 per cent last month, compared with one year earlier - as well as the cost of buying or leasing cars and trucks.

Most of the increase in natural gas costs was recorded in energy-rich Alberta, where prices soared by 34.4 per cent.

Quebec saw an 18.8 per cent increase in natural gas prices last month while those prices rose by 18.1 per cent in Manitoba and 16.1 per cent in British Columbia.

Those higher costs were partly offset by less expensive computer gear, as well as cheaper fresh vegetables.

Source: Canadian Press

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