Canada at a low risk for high inflation

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Among the risks looming over Canada's economy, from the U.S. fiscal cliff to Europe's recession, inflation does not rank high on the list.

The pace of consumer price increases has been tame for the past half year, running at an annual pace of 2 per cent or less since March.

In recent months, core inflation has been lower than the Bank of Canada had expected, and the central bank now says inflation won't pick up to its 2-per-cent target until the end of 2013, "somewhat later than previously anticipated." The finance department, too, noted last week that inflation has been weaker than it had forecast this year.

The next reading on inflation is due Friday, and economists are expecting October's pace stayed tepid at 1.1 per cent. Slow economic growth and a strong Canadian dollar, which makes imports cheaper, are the main reasons.

For an inflation-targeting central bank, there's not much pressure to raise interest rates.

A combination of weaker economic activity, slowing household credit growth and softer inflation mean "there is little fear the central bank will act on their tightening bias any time soon," Mark Chandler, head of Canadian bonds and currency strategy at RBC Dominion Securities Inc., said in a note.

"So, after an extended pause that has lasted 26 months, we can look forward to … an extended pause."

Gasoline is one of the main drivers of inflation, with prices up 4.7 per cent from last year. Food inflation has subsided – but costs could pick up in coming months due to higher agricultural commodity prices. Prices for natural gas and women's clothing are down from year-earlier levels.

Among provinces, prices in PEI and Quebec are up the most, with the smallest increases in Ontario and British Columbia.

Business owners anticipate little price pressure. The central bank's autumn business outlook survey showed inflation expectations eased for the second straight quarter. Nearly all the firms polled see staying within the bank's 1-to-3 per cent inflation-control range over the next two years.

Still, the inflation outlook in Canada is subject to "significant risks," Governor Mark Carney said in an Oct. 31 speech.

The main upside risks are the chance of higher global inflationary pressure, a pickup in Canadian exports and renewed momentum in the housing market. The major downside risks are Europe woes, weaker demand for Canadian exports and a slowdown in household spending.

"A subdued backdrop for underlying inflation will provide the [central] bank with the comfort it needs to monitor the evolution of conditions in the global economy heading into the resolution of the U.S. fiscal cliff early next year," wrote Toronto-Dominion Bank economists in a weekly note.

A reading of 1 per cent would put inflation on at a 28-month low, and at the bottom end of the Bank of Canada target range, noted BMO.