Canada Annual Inflation Slows in October to 1.4% -- Update

By Paul Vieira Features Dow Jones Newswires

Annual inflation in Canada slowed in October from the previous month, a result that is likely to reinforce the Bank of Canada's cautious approach to setting interest-rate policy.

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Canada's consumer-price index rose 1.4% on a year-over-year basis in October, Statistics Canada said Friday, following a 1.6% advance in September. The October figure matched market expectations, according to economists at Royal Bank of Canada.

On a month-over-month basis, prices rose 0.1%.

Gasoline prices rose 6.5% in October on an annual basis, a significant slowdown from the previous month's 14.1% advance, as the impact from Hurricane Harvey dissipated. Excluding gasoline, CPI climbed 1.3% in October.

Meanwhile, underlying, or core, inflation ranged from 1.5% to 1.7%, based on the preferred gauges used by the Bank of Canada, for an average of 1.6%.

The average core reading has been at 1.6% for the August-to-October period.

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The Bank of Canada sets the level of interest rates to achieve and maintain 2% inflation, or the midpoint of the target range. After two quarter-point rate rises in July and September, lifting the policy rate to 1%, the central bank said it was adopting a cautious approach.

Carolyn Wilkins, the Bank of Canada's senior deputy governor, elaborated on the central bank's view in a speech in New York on Wednesday.

"While some normal fluctuations can be expected within the target range, central banks may become disproportionately concerned about the prospect that inflation might fall outside the range," Ms. Wilkins said. As a result, the central bank "puts a greater weight on the downside risk when inflation is low to begin with."

In a number of advanced economies, inflation has run short of expectations despite a solid pickup in growth, leading some policy makers and economists to worry about the ability of central banks to manage inflation and inflation expectations.

Federal Reserve Bank of Chicago President Charles Evans said he was maintaining an open mind about whether to vote for another U.S. rate increase in December, even while harboring worries over inflation that has stayed well short of the Fed's 2% inflation target.

Jimmy Jean, economist at Desjardins Capital Markets, said the Canadian report was a mixed bag, as food and gasoline exerted a significant drag while the cost of certain services moved upward at a healthy pace.

"The message is inflation in Canada is subdued like it is globally, but we are moving very slowly toward the 2% target," he said. He added he still expects Bank of Canada rate increases in 2018, given the Canadian economy's "overall decent shape."

Canada's total inflation slowed over the first half of 2017 after reaching a peak of 2.1% in January even while spare production and labor capacity were shrinking rapidly and the country was posting the fastest pace of growth among Group of Seven economies. Up until October's report, price pressures had firmed after hitting a fresh low of 1% in June.

In October, seven of the eight major Canadian CPI components rose on an annual basis, with transportation and shelter contributing most to the increase.

Food prices rose 1.3%, but mostly due to a 2.9% surge in the cost of purchasing food at restaurants. In contrast, food purchased at grocery stores rose by a meager 0.6%.

Shelter costs rose 1.2%, led by a 3.9% increase in the homeowners' replacement cost -- which represents how much an owner must spend to maintain a residence's market value.

Weighing on October CPI was electricity, down 8.4% on a 12-month basis, and women's clothing, down 4.6%. Furniture prices also decreased, 3.1%.

The cost of goods advanced 0.4%, while the price paid for services -- such as haircuts, accounting, and plumbing -- climbed 2.2%.

On a seasonally-adjusted basis, inflation rose 0.2% in October on a month-over-month basis.

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

(END) Dow Jones Newswires

November 17, 2017 09:21 ET (14:21 GMT)