* Overall annual inflation rate 3.2 pct vs 3.1 pct in Aug
* Core rate 2.2 pct, highest since Dec 2008
* Energy, food, clothes explain higher CPI
* Rate cut expectations scaled back, C$ firms
By Louise Egan
OTTAWA, Oct 21 Canada's annual core inflation
rate jumped in September to its highest level in nearly three
years, causing traders to scale back the likelihood of central
bank interest rate cut this year or next.
The core rate sped up more than expected to 2.2 percent
from 1.9 percent in August, according to Statistics Canada data
on Friday. The core index is considered a better gauge of price
trends because it excludes eight volatile items including
gasoline and food.
"From a policy point of view, the increase in core has got
to be of the greatest concern," said Paul Ferley, assistant
chief economist at the Royal Bank of Canada.
"Certainly it will shift expectations or put more weight to
the next (rate) move being an increase, but, near-term, those
external pressures keep the Bank of Canada on the sidelines,"
The overall annual inflation rate came in at 3.2 percent,
remaining above the central bank's traditional comfort zone and
a notch above forecasts, as consumers were hit by higher
gasoline and food prices.
The return of price pressures at a time of weak growth has
been seen across many industrialized countries. Canada's
inflation rate, which has eased from a 5-1/2 year-high of 3.7
percent in May, remained tamer in September than the U.S. rate
of 3.9 percent or Britain's 5.2 percent, both three-year
Finance Minister Jim Flaherty said he was not too worried
by the inflation report.
"I'm more concerned quite frankly about growth, economic
growth, and I'm pleased that we are seeing reasonable, moderate
economic growth in Canada and some good signs in the United
States. I wish I could say that of Europe," he told reporters.
The Canadian dollar firmed after the data to a
session high of C$1.0067 to the U.S. dollar, or 99.33 U.S.
cents, up from Thursday's North American close at C$1.0150, or
98.52 U.S. cents.
The Bank of Canada targets annual inflation of 2 percent
within a control range of 1-3 percent. But Governor Mark Carney
has signaled he is willing to keep the benchmark interest rate
at an ultra-low 1 percent amid what he considers transitory
inflationary pressures because he is more worried about the
European debt crisis and the potential for another global
Economists and strategists expect the Bank of Canada to
keep rates on hold next Tuesday and beyond, with a increase
coming in the third quarter of next year, according to a
However, traders had been pricing in a rate cut, rather
than a hike next year. Overnight index swaps, which trade based
on expectations for the central bank's key policy rate, showed
that traders scaled back bets on a rate cut following the
release of the inflation data.
Sheryl King of Bank of America-Merrill Lynch said she
expects the Bank of Canada will send a message to markets in
its rate announcement next week that monetary easing is out of
"The odds are that the Bank of Canada is not going to
deliver a particularly dovish tone in their press release, not
just because of this," she said.
She added the bank should take price pressures more
seriously because high commodity prices are being passed
through to consumers and the Canadian dollar has come down from
recent highs, with less of a dampening effect on prices.
"This is going to be very challenging for the bank for the
next little while because I think they are underestimating how
much further inflation is going to rise."
Excluding just food and energy, annual inflation was a
tamer 1.9 percent.
On a monthly basis, the all-items CPI index edged up 0.2
percent in September compared with 0.3 percent in August. Core
CPI rose 0.5 percent versus 0.4 percent in the prior month.