By Akhil Shah

OTTAWA (MNI) – Statistics Canada Tuesday morning is expected to
report that Canadian headline inflation rose again in October but that,
overall, price pressures in Canada remained muted.

“The real story (of October’s CPI report) will be that core
inflation remains very muted, enough to keep the Bank of Canada on the
sidelines in terms of interest rate policy,” Avery Shenfeld, senior
economist and managing director of CIBC world markets, wrote over the
weekend.

The headline number in Canada is expected by economists surveyed by
Market News International to have risen to 2.2% year-over-year and not
seasonally adjusted, largely because of rising gasoline prices and, to
some extent, food price increases.

However, economists told MNI that other sectors in the CPI’s basket
of goods remained flat. The strong Canadian dollar also likely helped
restrain import prices as it approached parity with the United Stated
dollar.

Therefore, the core index, stripping out volatile items, is
expected to be flat on a not seasonally adjusted basis in October. On
an annual basis, core inflation would fall to 1.4% from 1.5% in
September, according to Emanuella Enanajor of Canadian Imperial Bank of
Commerce. Some other analysts would put core at 1.5% on an annual basis
in October. Either number is well below the Bank of Canada’s target rate
of 2.0%

Economist Enenajor told MNI that growth in the CPI is likely to run
below 2% in quarters to come, giving the Bank of Canada no reason to
raise the 1.0% key policy rate until the second half of 2011.

These analyst expectations follow gains of 1.9% in September and
1.7% in August in the headline number. On an annual basis, prices have
been on an uptrend since October 2009, rising by 2.0% till date. The
majority of the gain in September’s headline number came from a 5.6%
increase in energy prices. Economists interviewed by Market News
International see this trend continuing for the October inflation report
coming out on Tuesday, i.e. energy prices will continue to fuel
inflation.

The Canadian economy’s performance thus far this year prompts BOC
to expect that in the year ahead CPI in the first quarter of 2011 would
slow to 2.0% from an earlier prediction of 2.2%. However, inflation
expectations for the fourth quarter remain unchanged at 2.1%, BOC said
in its October monetary policy report.

Economists believe that these lowered expectations, along with
muted overall price measures for the basket of CPI goods, would lead BOC
to hold its key interest rate, the overnight rate, steady at 1.0% well
into 2011.

Enanajor sees the annual inflation rate climbing 2.1% in October
and on a monthly basis is expected to creep up 0.1%. Core CPI is
predicted to jump 1.4% on a 12-month basis and stay flat on a monthly
basis. “Gasoline prices at the pump were higher and we expect it to
drive inflation higher in the headline measure,” Enenajor said.

“Excluding the volatile items, the new-home prices were flat, and
that might have held down shelter costs, although inclusion of the
property taxes in October might have offset it a bit,” Enenajor added.
Every October in the year property taxes are included in the basket of
goods to compute inflation, and the offset would be seen just this one
time.

Diana Petramala, economist at the Toronto Dominion Bank, predicts
Canada will experience a 2.3% increase in prices in October compared to
a year ago. On a month-over-month basis Petramala sees Canadian prices
rising 0.3%. “Upward pressure would be coming from the food and energy
sectors largely because of significant increase in prices in the
agriculture sector,” Petramala said.

“The surge in the gasoline prices will contribute to a lesser
extent to the rise, because the food basket weighs more on the total
basket of goods compared to the energy basket,” Petramala added. Core
CPI is expected to edge up 0.1% October, while the year on year
statistic is expected to be 1.5% higher.

Robert Kavcic, economist at the Bank of Montreal, expects consumer
prices to rise 2.1% in the 12 months to October and increase 0.1% on the
month. “Core CPI is expected to advance 1.4% on an annual basis and
remain flat on a monthly basis.” “Gasoline prices were up 3.3% on the
month and will be expected to put upward pressure on the headline
number,” Kavcic said.

“Imported consumer goods will see some weakness because of the
strong Canadian dollar and will hold back inflation growth, though not
significantly,” Kavcic added.

Standing over it all, the strong Canadian dollar is expected
to hamper exports and prevent inflation from being more broad-based
rather than concentrate on one sector.

— Akhil Shah is a Need to Know News Reporter in Ottawa

** Market News International Ottawa **

[TOPICS: M$C$$$,MAUDS$]