The Canadian Consumer Price Index moderated a bit in December, slipping 0.3%, dropping headline CPI to 3.9% from a high of 4.3% in November.

BMO Nesbitt Burns notes that the $75 rebate and rollback of Ontario electricity prices helped cut the CPI. “Since electricity costs are included the Bank of Canada’s measure of core inflation, the CPIX fell 0.5% last month, trimming the annual core inflation rate to 2.7%,” it notes. “In the prior month, core inflation was at 3.1%, the first time it strayed above the top end of the Bank of Canada’s target band since official inflation targets were adopted in the early 1990s.”

“There was once again much less than meets the eye at first glance in today’s Canadian consumer price report — a familiar story over the past few months, and one that is making the data particularly difficult to interpret,” explains TD Bank. “As it has been the case so often this year, December’s numbers were skewed by a host of statistical quirks and one-off factors that have sent Canada’s inflation readings on a roller-coaster ride.”

Apart from the electricity situation, TD notes that the numbers were artificially boosted by another big hike in auto insurance premiums, not because they were actually raised during the month, but because Statistics Canada changed the base for its calculation from a typical 1998 vehicle to the 1999 model. “All told, had it not been for these statistical artifacts — which have little to do with actual inflation — the CPI would have been flat in December.”

Nesbitt says that the report offers few obvious examples of inflation pressure on the goods side, as clothing prices tumbled on heavy discounting, car prices were flat, and even alcohol & tobacco prices dipped slightly.

“In sum, once all the wiggles and quirks in the data are ironed out, there is little evidence of a smoking gun on Canada’s inflation front, notwithstanding the concerns expressed by the Bank of Canada in yesterday’s statement. With the Canadian economy likely to grow at a below-trend pace over the next couple of quarters, core inflation is likely to retreat back to the Bank’s 2% target by the second half of 2003, even if the Bank keeps interest rates unchanged until June,” says TD.

“Over the coming months, however, we are likely to see a material easing in both total and core inflation, taking aim at the mid-point of the Bank’s target band by summer. The comparison to more ‘normal’ prices will remove the current distortion in the year-over-year rate, while a period of softer GDP growth (below the economy’s 3% non-inflationary potential) will ease pressure in the core,” comments CIBC World Markets. “While today’s total CPI result wasn’t quite as friendly as the market had anticipated, that was offset by a larger-than-expected slide in the core. On balance, markets were left with little to move on. The Bank may be taking a more hawkish line on inflation, but as always, a period of slower growth ahead will give them reason to stand down from near-term rate hikes.”

RBC Financial Group economists say they expect the Bank of Canada to maintain a hawkish eye on inflationary pressures in coming months.

“For all of 2002, inflation averaged 2.2% versus 2.6% in 2001. Risks are tilted to a back-up in 2003,” concludes Nesbitt. “Today’s decline in the CPI could prove to be a one-month reprieve for the Bank.”