Canada CPI Grinds Higher in September on Gas Price Surge -- 2nd Update

By Paul Vieira Features Dow Jones Newswires

Canada's annual inflation rate accelerated higher in September for a third straight month, as gasoline prices surged due to the impact of Hurricane Harvey in oil-rich Texas.

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Nevertheless, the headline inflation figure is still below the Bank of Canada's preferred 2% target, underscoring how central banks across the developed world remain wary of removing stimulus too quickly amid stubbornly tepid inflation.

The all-items consumer-price index in September rose 1.6% from a year earlier, Statistics Canada said Friday, following a 1.4% advance in the previous month. The September rise was short of market expectations for a 1.7% advance, according to economists at Royal Bank of Canada.

On a month-over-month basis, CPI rose 0.2%.

The average annual rate of Canadian core inflation, based on three gauges used by the Bank of Canada, edged upward in September to 1.6%, an eight-month high. The three measures of core inflation, which aim to get a better read on underlying price pressures in the economy, ranged from 1.5% to 1.8%.

The Bank of Canada issues its next decision on interest rates this coming Wednesday, and the emerging consensus among market watchers is that governor Stephen Poloz will take a pause after increases in July and September.

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"While the latest inflation data would normally hint at another interest rate hike from the Bank of Canada, the increased uncertainty around the North American Free Trade Agreement and domestic housing risks will likely mean that it keeps rates on hold next week," said David Madani, economist at Capital Economics.

Mr. Poloz said last month that starting in October, the central bank would work from a clean slate when making rate decisions as it contends with an uncertain outlook for inflation. Factors clouding this outlook include the impact of technology, especially in driving down prices in the retail sector; slower wage growth; and what impact rate rises will have on the record levels of Canadian household debt.

Meanwhile, the International Monetary Fund this month lowered its outlook for inflation to 1.7% in advanced economies over the next two years, below the 2% rate most advanced countries target and below forecasts earlier this year. In a report, the IMF cautioned wage growth is likely to remain weak around the world, even though its own forecast expects a pickup in global growth.

Federal Reserve Chairwoman Janet Yellen said recently she expected the U.S. central bank to continue slowly raising short-term rates, but she expressed caution about how weak inflation might affect that path.

A pickup in inflation can have positive effects on an economy. It might prompt consumers to buy goods and services before prices head even higher. Further, it provides flexibility to firms to offer wage increases to employees, thereby giving consumers more income to spend.

In its quarterly survey of firms, released this week, the Bank of Canada said inflation expectations among businesses edged upward for the first time since the oil-price shock. Nearly 40% of firms surveyed expect inflation to increase between 2% and 3%, compared with 24% of respondents in the previous quarter.

In Canada's September CPI report, a 14.1% rise in gasoline from a year ago was among the factors pushing price pressure upward. The rise in gas prices was due to supply disruptions caused by Hurricane Harvey, which forced refineries in the Houston area to shut down. The homeowners' replacement cost, or the price a homeowner has to pay to maintain a residence at its current market value, rose 4% in September. Food prices rose 1.4% in September.

Offsetting the price increases was an 8.6% one-year decline in the price of electricity.

Overall, the Canadian data agency said the cost of goods climbed 0.8% from a year ago, while prices for services -- such as haircuts, accounting and legal advice -- increased 2.1%.

On a seasonally adjusted basis, Canada's CPI rose 0.2% in September from the previous month.

Write to Paul Vieira at paul.vieira@wsj.com

(END) Dow Jones Newswires

October 20, 2017 09:41 ET (13:41 GMT)