• As anticipated, Canada's headline (all-items) CPI continued its decline in December, dropping for a fourth consecutive month. All-items CPI was down 0.7% (or 0.4% when seasonally-adjusted) from November, which brought inflation to 1.2%, well below the target rate of 2.0%. The retreat in gasoline prices and general economic weakness continued to take the steam out of inflationary pressures, and will continue to do so in the coming months and quarters. The Bank of Canada expects headline inflation to be negative in Q2 (-0.6%) and Q3 (-1.0%) of 2009.

• The current bout of disinflation is still largely an energy price deflation story. Gasoline prices down 25.8% from December 2007. In contrast, inflation excluding gasoline still ran at 2.6%. Nonetheless, the decline in headline inflation rates was felt everywhere, but more so in Atlantic Canada, where headline inflation for the region as a whole came in flat at 0.0%. New Brunswick (-0.6%) and Nova Scotia (-0.2%) recording outright deflation, whereas P.E.I. (0.0%) had a flat reading. Only Newfoundland & Labrador (+1,2%) kept the Atlantic region from recording deflation.

• The Atlantic region will continue to lead this trend downward, likely followed by Québec then Ontario and B.C. in Q1. The Prairies might not experience outright deflation, but just very low inflation (below 1.0%).

• The CPI data for December helps dispel fears that the uptick in core inflation seen in November would continue. The easing in national core inflation in December is being reflected in the CPI excluding food & energy inflation measure, which stood at 1.5%, down from the 1.6% in November. Six out of ten provinces saw inflation ease by that measure, and no province recorded an increase.

TD Provincial Inflation Monitor