Canadian annual inflation rate slows in December amid renewed COVID-19 restrictions

OTTAWA (Reuters) - Canada’s annual inflation rate slowed to 0.7% in December from 1.0% the previous month amid a new round of COVID-19 lockdowns and declining costs of airplane tickets, clothing and footwear, Statistics Canada said on Wednesday.

FILE PHOTO: A Canadian dollar coin, commonly known as the "Loonie", is pictured in this illustration picture taken in Toronto January 23, 2015. The Canadian dollar strengthened against the U.S. dollar on Friday after Canadian CPI data showed an increase in core inflation. REUTERS/Mark Blinch (CANADA - Tags: BUSINESS)

Headline inflation was below analyst expectations for inflation to remain at November’s 1.0% rate. Consumer prices fell 0.2% on the month, as did the cost of food.

“It’s an unexpected slowdown in inflation,” said Royce Mendes, a senior economist at CIBC Capital Markets. “Looking at the details, I don’t think it much changes the thinking at the Bank of Canada.”

The Bank of Canada left its benchmark interest rate unchanged at 0.25% on Wednesday and reiterated it did not expect inflation to return sustainably to its 2% target until 2023.

However, the central bank said COVID-19 vaccines had helped brighten the outlook.

“The arrival of effective vaccines combined with further fiscal and monetary policy support have boosted the medium-term outlook for growth,” the bank said.

The Canadian dollar was trading 0.8% higher at 1.2635 to the greenback, or 79.15 U.S. cents, after the rate announcement.

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Two of the three core measures of inflation fell in December. The common measure, which the Bank says is the best gauge of the economy’s underperformance, was unchanged at 1.8%.

Both Ontario and Quebec, Canada’s most populous provinces, imposed tighter health restrictions in December as the novel coronavirus spread.

Canada reported 4,679 new COVID-19 cases on Tuesday, and has seen more than 18,000 total deaths since the start of the pandemic.

“It should be expected there would be slack in the economy given the persistent shutdowns related to COVID,” said Andrew Kelvin, chief Canada strategist at TD Securities. “It’s nonetheless... a touch more concerning to see the move in the core measures than it is in the headline measures.”

(This story fixes garbling in headline.)

Reporting by Julie Gordon and Steve Scherer in Ottawa, additional reporting by Fergal Smith and Jeff Lewis; Editing by Chizu Nomiyama and Bernadette Baum