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Inflation surprisingly soft as cheaper food offsets higher gas prices

Last Updated Apr 21, 2017 at 11:00 am PST

Various vegetables are on display at the Jean Talon Market in Montreal on January 11, 2016. The country's annual inflation rate slowed to an unexpectedly weak 1.6 per cent last month as the continued decline in food prices played a big role in offsetting the higher cost of gasoline. The latest reading from Statistics Canada shows the pace of inflation decelerated from February's year-over-year reading of two per cent, which was right on the Bank of Canada's ideal target. THE CANADIAN PRESS/Paul Chiasson

OTTAWA – The country’s annual inflation rate slowed to an unexpectedly weak pace last month as the continued decline in food prices played a big role in offsetting the higher cost of gasoline, Statistics Canada said Friday.

The latest inflation numbers appear to support the Bank of Canada’s assessment that despite months of improving data, the economy has more room to grow before it returns to full capacity.

Statistics Canada’s consumer price index reading of 1.6 per cent shows the pace of inflation decelerated from February’s year-over-year reading of two per cent, which was right on the Bank of Canada’s ideal target.

Economists had predicted 1.8 per cent inflation for March, according to Thomson Reuters.

The softer-than-expected result followed months of surprisingly robust economic data — a string of improvements that prompted the Bank of Canada to boost its growth projection for the year to 2.6 per cent, up from its January call of 2.1 per cent.

But despite the solid numbers, bank governor Stephen Poloz said last week that it was still early days and the economy had yet to prove it can stay on the higher growth path. Poloz also warned of persistent risks that suggested the bank would not hike its benchmark interest rate any time soon.

BMO senior economist Benjamin Reitzes said Friday’s inflation figures were very consistent with the Bank of Canada’s message that the economy still has a way to go.

“There is still a lot of spare capacity in the economy and until inflation picks up they’ll probably stick with that narrative,” he said in an interview.

“It will keep them kind of singing the same tune.”

TD senior economist James Marple said the presence of soft inflation despite improving growth suggests Canada still has room to expand, particularly for an economy still recovering from the oil-price shock.

Economists also noted a slowing pace for three measures released Friday by Statistics Canada for core or underlying inflation. These readings, which are designed to strip away more volatile components, are closely watched by the Bank of Canada.

National Bank senior economist Matthieu Arseneau wrote in a note to clients that underlying inflation usually takes three to five quarters to catch up to other economic data points.

“For this reason, we continue to expect core CPI to speed up in 2017 in line with the recent economic momentum,” Arseneau wrote.

Statistics Canada’s numbers Friday showed some of the biggest downward forces on inflation were lower prices for clothing and footwear, which declined 0.9 per cent, and food, which fell 1.9 per cent.

A closer look at the data showed that, compared with a year earlier, the cost of fresh fruit dropped 12.4 per cent while fresh vegetable prices fell 10.2 per cent.

The agency said higher costs for transportation and shelter made big contributions to the upward pressure on prices. For example, gas prices increased 15.2 per cent last month.

Higher prices for travel tours, which rose at a 6.8 per cent rate, were also among the primary contributors to the change in inflation.

Excluding food and energy prices, the report said annual inflation was up 1.7 per cent last month, which follows a two per cent increase in February.

Across Canada, Prince Edward Island was the only province that saw its annual inflation rate accelerate last month.

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