The 12-month increase in the Consumer Price Index eased to 2% in August from 2.2% in July. Statistics Canada said August’s 12-month increase was well below the recent peak reached in February and was the lowest since July 2002.

While Canadian consumer prices were a bit lower than expected in August on the headline result, the rise in core prices — excluding volatile energy and food prices — was in line with market expectations.

Excluding energy, the CPI advanced 1.6% from August 2002 to August 2003, after rising 1.8% in July.

Automotive vehicle insurance premiums, as well as natural gas and gasoline prices were primarily responsible for the 12-month increase in the All-items CPI.

Homeowners’ replacement cost, last September’s tuition fees, homeowners’ insurance premiums, and prices for cigarettes and food purchased from restaurants also contributed to the 12-month increase, said StatsCan.

Bank of Montreal says that the sharp downward trend in core inflation, alongside renewed strength in the Canadian dollar, raises the odds of a further reduction in interest rates. “In fact, in the wake of today’s report and Monday’s release of disappointing retail sales data, the market has now fully priced in a 25-basis points reduction at the October 15 fixed announcement date,” BMO reports.

“Whether the Bank of Canada cuts rates or not will depend on the near-term performance of both the economy and the currency. While we still expect rates to remain on hold for the balance of the year amid a strengthening economy, any renewed softness in the data or sustained strength in the currency would likely trigger a further easing in policy.”

BMO Nesbitt Burns says that the only surprise in today’s report was the steep drop in vegetable prices, which helped offset the bump-up in gasoline costs.

TD Bank says that financial-market expectations for another rate cut before the end of the year may be disappointed, but, “Today’s data leave us with every reason to stick to our call that the Bank of Canada will not be raising rates again until the second half of 2004.”

CIBC World Markets says that it doesn’t expect the core inflation rate to re-attain the Bank of Canada’s 2% target through the end of 2004, likely recording an annual average of 1+% or less next year. “With inflation on an unambiguous downward track, growth likely to remain sub-par and the Canadian dollar regaining significant strength, the case has been made for further Bank of Canada interest rate relief. Developments in the currency market, and the always-important employment report (next due on October 10), are likely to be key determinants of whether the Bank opts to cut rates on October 15 or waits until December.”

http://www.statcan.ca/Daily/English/030923/d030923a.htm