World Economic

OTTAWA–Canada’s inflation rate is in a downward spiral as the strong loonie and the impact of the one-point reduction in the goods and services tax start cutting into prices of consumer goods.

Statistics Canada said yesterday that inflation slipped to 2.4 per cent on an annualized basis in December from 2.5 per cent the previous month, and the core index – which the Bank of Canada also uses to monitor inflation – fell one-tenth of a point to 1.5 per cent, the lowest in two years.

And inflation is due to take a further downturn this month, the first month that consumers will benefit from the reduction in the GST to 5 per cent, announced last October.

If the entire one-point drop is passed on to consumers, the GST effect will reduce prices across the board by about 0.6 per cent.

"This is good news for consumers because their purchasing power is going further," said Michael Gregory, an analyst with BMO Capital Markets. "Although the Bank of Canada expects core inflation to average as low as 1.3 per cent year-over-year during the first half of this year, the double-whammy of the strong Canadian dollar and weak U.S. economy casts downside risk on this already very low inflation projection."

The dollar closed down 0.09 of a cent v (U.S.) at 99.3 cents yesterday after jumping 1.7 cents Thursday.

With inflation no longer on the radar screen, the central bank has been given more room to cut interest rates sharply in response to a weak economy or as a lever to control another surge in the loonie.

The currency’s gains, while considered good for consumers, are causing havoc in the manufacturing and forestry sectors.

Bank of Canada governor David Dodge said on Thursday that although he doesn’t expect Canada to slip into recession, growth will be significantly curtailed this year, particularly in the first three months.

He said the economy is expected to grow at a meagre 0.6 per cent pace during the first quarter and at about 1.8 per cent for the year.

"Expectations of lower inflation and slower growth will keep the bank in rate-cut mode in the months ahead and we expect a 50-basis-point easing at the next fixed action date in March," said RBC senior economist Dawn Desjardins.

While gasoline prices, heating oil and mortgage costs continue to lead the way in pushing inflation up, the number of items applying the brakes keeps growing.

Books and automobiles became the cause célèbre last fall among critics who complained retailers were not passing on the savings of the loonie rising to – and past – parity with the U.S bad credit payday loans. currency.

StatsCan said prices for books and other reading materials fell 9 per cent last month from November. And there were dollar-related savings available when purchasing or leasing autos, which fell 4.1 per cent in December.

Source