Canada's annual inflation rate remained tame in September at 1.2 percent, unchanged from August and leaving little justification for the Bank of Canada to maintain its hawkish bias when it sets interest rates next Tuesday.
Core inflation, which excludes gasoline and other items to reveal underlying price pressures, also came in below forecasts at 1.3 percent, down from 1.6 percent in August, according to a Statistics Canada report on Friday.
In the final data point before the central bank decides its policy stance, Statscan said a moderation of price hikes for cars, food and natural gas helped offset sharp rises in the price of gasoline and in electricity costs.
"It shows (an) almost complete absence of inflation pressure in Canada's economy. Wage growth is moderate, the strong Canadian dollar is dampening import costs, and retailers are challenged by cross-border shopping," said Sal Guatieri, senior economist at BMO Capital Markets.
"This clearly weighs towards the Bank of Canada shifting towards a neutral stance next week, perhaps dropping any reference to future rate increases," he said.
Market analysts had expected a 1.3 percent year-on-year rise in the overall consumer price index in September and a 1.5 percent jump in core CPI.
The Canadian dollar held steady after the data at C$0.9895 to the U.S. dollar, or $1.0106, after closing at C$0.9849 on Thursday.
On a monthly basis, the non-seasonally adjusted CPI climbed 0.2 percent in September, unchanged from August. The core CPI also rose 0.2 percent compared with a 0.3 percent climb in the prior month.
The bank has been telegraphing since April its inclination to raise rates rather than lower them. But a majority of analysts in a Reuters poll this week predicted it would soften its tone somewhat next week.
Inflation has been at or below the central bank's 2 percent target since March so price pressures appear to be the least of policymakers' worries, with soaring household debt and a hot housing market seen as the main source of concern.
Still, forecasters see the bank holding its benchmark interest rate at 1.0 percent until the fourth quarter of 2013.
Traders slightly increased bets on a rate cut in the coming year after the inflation data, according to overnight index swaps, which trade based on expectations for the central bank's key policy rate.
In the year to September, gasoline and electricity were the main upward contributors to inflation in Canada.
However, price growth for passenger vehicles retreated to just 0.2 percent in the 12 months to September, compared with a 2 percent jump in August. Food price increases moderated to 1.6 percent in the 12-month period from 2.2 percent in August.
Statscan said the newly elected Quebec government's decision to freeze university tuition fees resulted in a 3.7 percent rise in these fees in September versus 4.2 percent previously.
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