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Canada inflation slows; GDP chugs along

Jennifer Kwan

Mixed Canadian inflation and growth data garnered little reaction from markets on Friday with the focus squarely on rising tensions in U.S. budget talks.

Canada's annual inflation rate in November fell to 0.8 per cent, the lowest level in three years, largely on a smaller rise in gasoline prices and lower prices for cars, the country's official number cruncher Statistics Canada said.

The rate was the lowest since October 2009 and was a tad softer than economists and market strategists had expected.

Separately on Friday, data showed the Canadian economy grew a meager 0.1 per cent in October from September, highlighting a fragile economy. But it is still growth and is welcome, said Camilla Sutton, chief currency strategist at Scotiabank.

"The data points were somewhat mixed. GDP was as expected and showed month-over-month gains, which is positive. However, the inflation data was contained or subdued, which likely pushes out expectations for Bank of Canada policy hikes. So very minor reaction overall," said Sutton, referring to moves in the Canadian dollar.

"In terms of the focus right now it is 99 per cent on the fiscal cliff and the rising risk that there is no agreement by the end of the year."

Investors' nerves were rattled on Friday after a new setback in talks to avert a U.S. fiscal crisis came down the prior evening. A proposal from Republican leader John Boehner to avoid the so-called fiscal cliff failed to get support from his party on Thursday. That news brought uncertainty over the ability to avoid the detonation of tax hikes and spending cuts that could push the U.S. economy into recession next year.

"Uncertainty surrounding the issue will likely keep markets on edge," said Emanuella Enenajor, an economist with CIBC World Markets.

The nitty gritty

The core inflation measure, which strips out the most volatile components, dropped to 1.2 per cent in November from 1.3 per cent in October, Statistics Canada said. That reading could conceivably give the central bank more breathing room on the timing of a rate hike, which it insists must eventually happen.

"The Bank of Canada has little to worry about on the inflation front with broad price trends still very benign," Robert Kavcic, an economist at BMO Capital Markets, in a note.

The major reason for the weaker reading was gasoline prices, which rose an anemic 0.4 per cent in the 12 months to November compared with a 4.0 per cent jump in October. As well, motor vehicles cost 1.8 per cent less last month than they did in the year-before period, the agency said.

On GDP, Canada's economy grew by 0.1 per cent in October, following no growth in September and a 0.1 per cent decline in August.

The output of service industries advanced 0.1 per cent in October, primarily a result of increases in wholesale and retail trade. The increases outweighed declines in transportation services and in the arts and entertainment sector, Statistics Canada said.

Goods production was unchanged in October. Increases in mining and oil and gas extraction and utilities were offset by declines in manufacturing and construction.