Canada December inflation at 3-year low

Canada's inflation rate in December hovered at a three-year-low of 0.8 per cent, Statistics Canada said on Friday in a softer reading than market analysts had forecasted and underscoring the Bank of Canada's decision this week to delay a possible interest rate hike.

The rate is lower than the 1.2 per cent market watchers had expected, and far below the central bank's 2.0 per cent target.

"This morning's information does confirm that without a doubt there's no inflation risk that is imminent in Canada," said Jack Spitz, managing director of foreign exchange at National Bank Financial. He added the Canadian dollar continued its descent on expectations that the Bank of Canada will hold its key interest rate at 1.0 per cent for longer.

The annual core inflation rate, which excludes the most volatile items and is closely watched by the Bank of Canada, dropped to 1.1 per cent from 1.2 per cent in the prior period.

On Wednesday, the Bank of Canada cited muted inflation as one of the reasons for pushing back a possible rate hike, saying it was "less imminent" than it had previously thought.

"Today’s data suggest that indeed as the bank indicated this week substantial slack in the economy continues to weigh on the price pressures, removing the need for any policy action for the foreseeable future," said Emanuella Enenajor, an economist at CIBC World Markets.

Food prices rose by 1.5 per cent on a year-over-year basis in December, slipping from 1.7 per cent in November, said Statistics Canada. Gasoline prices rose by 1.0 per cent in December, up from the 0.4 percent rise in November.

The inflationary outlook is expected to remain much more benign and the Bank of Canada does not expect headline and core inflation to reach 2 per cent until the second half of 2014, said Mazen Issa, Canada macro strategist at TD Securities.

"Despite the softer inflation profile, we would caution against expecting rate cuts from the Bank of Canada," he said. "Both we and the Bank expect the economy to gain traction towards the second half of 2013."

The annual average increase in consumer prices was 1.5 per cent in 2012 -- the lowest since 2009 -- compared to a 2.9 per cent rise in 2011, Statistics Canada said. The agency said the average of the annual increases in the CPI since 1992 is 1.8 per cent.