UPDATE 3-Canada inflation data shows price pressures constrained

Fri Nov 23, 2012 11:22am EST

* 12-month rise in gasoline and electricity prices slows

* Prices up in all CPI components except clothing, footwear

* Core inflation unchanged from September at 1.3 pct

* Bank of Canada to stay on sidelines, economic analysts say

By Louise Egan

OTTAWA, Nov 23 (Reuters) - Canadian inflation was slightly stronger than expected in October as prices rose for almost all consumer items, but the rate remained well below the central bank's 2 percent target, suggesting interest rate hikes are still a long way off.

Inflation has remained at, or below, the Bank of Canada's 2 percent target for eight consecutive months, according to Statistics Canada data on Friday.

The consumer price index rose 1.2 percent in October year-on-year, while the core inflation rate, which excludes prices for gasoline and other volatile items, was up 1.3 percent. Compared with September, the gauges rose 0.2 percent and 0.3 percent, respectively.

The annual rates were unchanged from September but slightly above forecasts of 1.1 percent and 1.2 percent inflation by market players in a Reuters poll.

The lack of inflationary pressure means Bank of Canada Governor Mark Carney has no reason to raise rates soon. He is the only central bank chief in the world's major industrialized economies to talk about hiking rates, a move that would be made to prevent inflation from overshooting the bank's inflation target in the medium term.

"It doesn't really change the story - it's really limited inflation pressure in Canada," said Sal Guatieri, senior economist at BMO Capital Markets.

"Both measures, headline and core, are running a bit below the Bank of Canada's estimates for the fourth quarter, so it may need to revise down its inflation outlook again," he said.

The central bank's projections show inflation averaging 1.5 percent in the fourth quarter and a core rate of 1.6 percent in the same period, returning to the desired 2 percent by the second half of next year.

Carney has signaled since April that he may need to withdraw monetary stimulus as the domestic economy expands despite the global headwinds. Last month, he softened his hawkish tone somewhat to say rate hikes were "less imminent" and would happen over time, but his central message remains that rates will go up, not down.

"Certainly (there is) no pressure on that front to move rates higher and the bank can keep policy highly accommodative to generate a bit more momentum in terms of growth," said Paul Ferley, assistant chief economist at Royal Bank of Canada.

Canada's primary securities dealers expect the bank to begin tightening monetary policy in the fourth quarter of next year, according to a Reuters poll last month.

But markets are more bearish. Overnight index swaps, which trade based on expectations for the central bank's key policy rate, showed that after the data on Friday traders are pricing in only a small chance of a rate hike in late 2013.

The Canadian dollar strengthened to C$0.9956 to the U.S. dollar, or $1.0044, from C$0.9972, or $1.0028, at Thursday's North American close.

Gasoline and electricity prices rose at a slower year-on-year pace than in September, while prices for food, air travel and property taxes rose more sharply, Statistics Canada said.

Prices rose in all major components except clothing and footwear.

But energy prices helped keep inflation low as gas prices rose 4 percent in the year to October, easing from 4.7 percent in September. Electricity price gains slowed to 1.7 percent year-on-year from 6 percent. Natural gas fell 11.6 percent after decreasing 14.2 percent in the previous month.

Upward pressure on inflation came from food prices, which jumped 2 percent from a year earlier compared with 1.6 percent in September versus September 2011. Year-on-year price growth also sped up for air travel and property taxes.