Tavia Grant

Inflation in Canada remains tame, giving the country’s central bank little reason to budge on its commitment to keep interest rates low until mid-year.

Consumer prices rose a less-than-expected 1.3 per cent in December from a year earlier after a 1-per-cent pace in November. Less volatile core prices, which the Bank of Canada monitors as a guide to future inflationary trends, stayed at 1.5 per cent, Statistics Canada said Wednesday.

Inflation remained muted as a drop in furniture, computer and mortgage interest costs took the edge off higher prices at the pump. The Bank of Canada said Tuesday that though core prices are running at slightly higher than it expected in recent months, it is sticking to its pledge of keeping rates at a record low until June, provided the outlook for inflation doesn’t change.

“There seems little likelihood that Canada or any of the other G7 countries will be experiencing a build up of inflation due to economic capacity constraints any time soon,” said Stewart Hall, economist at HSBC Securities (Canada), in a morning note.

The Canadian dollar fell Wednesday morning and its decline picked up speed after the report was released. The loonie fell to a two-week low of 95.63 cents (U.S.) from Tuesday’s close of 97.02 cents.

Inflation remains contained in Canada as factories are still reporting excess capacity while a soft labour market suggests little wage pressure. The Canadian dollar, which has climbed about 20 per cent in the past year, is playing a key role too, by keeping import prices low.

“Even in a recovery, inflation does not seem to be a problem for Canada,” said Krishen Rangasamy, economist at CIBC World Markets Inc. “Excess capacity and the strong currency are allowing Canadians the benefit of low prices and therefore low interest rates for longer.”

For 2009 as a whole, consumer prices rose 0.3 per cent, the smallest increase in 15 years and significantly slower than the 2.3-per-cent rise in 2008.

On a monthly basis, consumer prices fell 0.3 per cent in December from November on lower prices for household operations, furnishings and equipment and clothing and footwear.

Economists had expected annual prices would accelerate to 1.6 per cent and monthly prices would slip 0.1 per cent.

Overall shelter costs fell 1.7 per cent from a year earlier thanks to a 31.2-per-cent drop in natural gas prices and lower mortgage interest costs. The mortgage interest cost index, which measures the change in the interest portion of payments on outstanding mortgage debt, fell 4.9 per cent in December, Statscan said. Homeowners’ replacement cost fell 1.2 per cent.

Prices for passenger vehicles fell 3.3 per cent from last year while furniture and household textiles also saw declines.

While most food costs rose, prices fell for fresh fruit, pre-cooked frozen food preparations, and potatoes.

Computer equipment and supplies and home entertainment equipment, parts and services prices continued to fall.

Upward pressure came from gasoline prices, which rose 25.6 per cent from last December.

Food prices rose 1.7 per cent, matching November’s increase. Prices for dairy products and eggs rose 1.9 per cent while prices for non-alcoholic beverages went up 4.8 per cent. Food purchased from restaurants, sugar and confectionery, lettuce, and bakery and cereal products also rose.

Other goods that are getting more costly include communications, child care and domestic services, and paper, plastic and foil supplies.

Tuition fees, cablevision and satellite services, and recreational vehicles are also more expensive.

Homeowners’ maintenance and repairs costs rose 3.3 per cent while property taxes climbed 4.3 per cent.

Among provinces, Prince Edward Island, New Brunswick and Nova Scotia posted the largest increases, mostly due to higher gasoline prices.