Canada's inflation rate eases to 1.2% in December

Canada's annual inflation rate came in at 1.2 per cent in December, down from the two per cent annual rate seen in November, Statistics Canada reported Friday.

The December increase in consumer prices was the smallest increase since January 2007 and was due to a sharp decline in the price of gasoline.

Statistics Canada said prices that consumers paid for gasoline in December were 25.8 per cent below levels in the same month the year before.

"This was the largest drop since the inception of the gasoline price index in 1949 and followed a 14.4 per cent drop in pump prices in November," Statistics Canada said.

Prices were also lower for passenger vehicles, women's clothing and fuel oil.

While gasoline prices were the main factor in the decline in the overall national inflation rate, food prices were higher. Food rose 7.3 per cent during the 12-month period, following a 7.4 per cent increase in November. Fresh vegetable prices were up by 26.9 per cent, while bakery and cereal products were up by 12.4 per cent.

Deflation seen in Maritimes

Consumers in New Brunswick and Nova Scotia saw an outright drop in consumer prices in the 12 months to December.

In New Brunswick, average prices in December 2008 were 0.6 per cent below levels in the same month a year earlier. In Nova Scotia, the 12-month decline was 0.2 per cent.

Statistics Canada said it marked the first time since October 2006 that the annual price change in any province fell into negative territory.

Several economists are projecting the Canadian inflation rate will dip into negative territory in the months ahead.

RBC assistant chief economist Dawn Desjardins sees inflation turning negative around mid-year and averaging just 0.5 per cent for all of 2009.

Desjardins said the so-called core rate — which eliminates the impact of eight volatile factors plus indirect taxes — averaged 1.7 per cent in 2008 and is expected to moderate this year as more slack grows in the economy.

"However, moderating this impact somewhat will be rising prices for imported goods on the back of the weakening Canadian dollar," she said.

BMO Capital Markets economist Douglas Porter said Canada’s inflation rate is now more than a full percentage point above the U.S. pace, and the possibility of deflation is much less of a pressing risk here, due to the weaker loonie and firm wage gains.

"But even on that front, the rapid weakening in the economy is expected to eventually take a big bite out of any lingering inflation pressures," Porter said.