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The Target Canada store in Guelph, Ont.

Tim Fraser/The Globe and Mail

Thank Target Corp. and the foreign retail invasion for today's low prices.

That's the view of the Bank of Canada, which says the continued expansion of big-box stores in Canada along with the arrival of major U.S. retailers – cheap-chic Target opened its first stores last month – and stepped-up online shopping is keeping inflation low.

The Bank of Canada's policy report on Wednesday also points to increased cross-border shopping, prompted by the strength of the Canadian dollar and expanded duty-free exemptions for short trips, for keeping prices at bay.

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So while many Canadians lament that prices are often lower in the U.S. than in Canada, the Bank of Canada says we have it pretty good.

"Total and core [consumer price index] inflation have remained low in recent months," its report says. "There has been considerable monthly volatility, however, largely related to movements in auto prices."

The low level of core inflation, at an average of 1.2 per cent in January and February, reflects muted price pressures across a wide range of goods and service, it says. This is consistent with the material excess capacity in the economy as well as heightened competitive pressures on retailers from both domestic and foreign sources, it adds.

Besides the retail crunch, the report says a number of special factors have put downward pressure on core inflation in recent quarters, including slower increases in regulated prices (such as auto insurance) and the relatively large impact of past declines in the world prices of agricultural commodities on food and clothing prices in Canada.

Total CPI inflation, which averaged 0.9 per cent in January and February, has been restrained by low core inflation as well as by declining mortgage interest costs, although this has been offset in part by higher prices for gasoline in recent months, it says.

Core inflation is expected to remain subdued in coming quarters before rising gradually to 2 per cent by mid-2015 as the economy returns to full capacity, the special factors that are weighing on core inflation subside and inflation expectations remain well anchored, it says.

Total CPI inflation is projected to remain near 1 per cent through a large part of 2013, owing to low core inflation as well as the dampening impact of lower mortgage interest costs. Thereafter, total CPI inflation is expected to return gradually to target by mid-2015. The profile for total inflation is some­what lower than in the January Report, mainly because of more subdued core inflation.

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