Canada: Inflation Tame in December

Overall Canadian consumer prices rose 2.4% from year ago levels in
December, just a tad below market expectations for a 2.5% gain, and up
from 2.0% in the prior month.

Energy prices (+10.5% y/y) exerted the most upward pressure on
consumer prices in the month, led by elevated gasoline prices (+13%),
but also with gains in natural gas and electricity.
Excluding food and energy, inflationary pressures were mild in the
month, with consumer prices rising modestly to 1.6%, from 1.5% in the
prior month. Price pressures remained modest among most major
components, except for transportation where prices for motor vehicles
have been gaining strongly for the last year.

The Bank of Canada's (BoC) core measure of inflation, which excludes
eight most volatile components including food and energy, edged up in
the month, rising 1.5% from year ago levels, up from 1.4% in the prior
month, but below market expectations for a reading of 1.6%.
Nevertheless, core inflation remains well below the Bank of Canada's
2.0% target.

*Key Implications*
Today's inflation report was below market expectations, but in line
with the BoC's expectations outlined in January's Monetary Policy
Report (MPR). In the most recent MPR, the Bank of Canada upgraded the
U.S. outlook, but only marginally altered the Canadian inflation
outlook, emphasizing the risks. This had markets beginning to price
out a March rate hike from the Bank of Canada. Today's soft inflation
report suggests there is little urgency for the Bank of Canada to lift
the overnight rate from its current low level of 1.0%.

Going forward, the only significant inflationary pressure will likely
stem from food prices. Much like we are seeing on the international
scale, rising agricultural commodity prices are likely to feed into
higher grocery bills for Canadians in the coming months. Nonetheless,
outside of food, inflation pressures will remain under wraps.

Expectations that crude oil prices will remain flat during 2011,
suggests that energy price pressures will abate in the coming months.
Further, a cooling in the Canadian housing market, moderate consumer
spending, and a Canadian dollar above par will likely keep inflation
in check for the first half of 2011. All said, we expect inflation to
continue to average just 1.5% over the first half of 2011, and only
gradually climb to 2.0% by mid-2012.

A modest outlook for inflation, in combination with the risks to the
global financial system outlined in the BoC's monetary policy report
gives the Central Bank plenty of room to remain on hold until July of
this year, and when it does start to raise rates, it can move at a
gradual pace. Markets may finally be starting to accept this view.
Source: ActionForex.Com