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Canadian CPI exceeds forecast, but inflation remains subdued

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Canadian CPI exceeds forecast, but inflation remains subdued

Canada’s inflation rate slowed last month, reinforcing policymakers’ neutral stance on interest rates.

Consumer inflation in Canada rose at an annualized rate of 1.1 percent in February, following a 1.5 percent increase the previous month, Statistics Canada reported today in Ottawa. The headline reading, which was above forecasts calling for 0.9 percent, reassured the markets policymakers will likely leave rate cuts off the table for the time being.

Compared to the previous month, consumer prices were up 0.8 percent.

Lower gasoline prices were the biggest factor behind the deceleration in the consumer price index, government data showed. Compared to the previous 12 months, gasoline prices fell 1.3 percent in February, following a 4.6 percent increase the previous month.

Lower prices at the pump partially offset rising shelter and food costs. The cost of shelter increased 2.2 percent year-over-year, while the price of food increased 1.1 percent over the same period.

Persistently low inflation was the central bank’s biggest concern in 2013, causing it to abandon its rate-hike bias. Investors sizing the Canadian economy should feel reassured inflation is still trending within the Bank of Canada’s target range of 1 to 3 percent. This makes the possibility of a rate cut less likely.

The Canadian dollar was trading higher amid the news. The loonie was up 25 pips to 0.8919 US in North America’s morning session. The USDCAD currency pair eased off its four-and-a-half year high, hitting a low of 1.1178. Prior to the noon hour the pair was trading at 1.1207.

Any further slowdown in Canadian inflation threatens to send the USDCAD pair to fresh highs. The markets are poised to bid up the greenback amid recent developments out of Washington, which show the Federal Reserve is willing to raise interest rates as early as Q2 2015.

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