Canadian consumer prices fell in September from a year earlier due largely to tumbling gasoline prices and while there was other evidence of emerging inflation pressures, it was not expected to be of concern to the Bank of Canada.

The mixed results ruled out any specter of either prolonged deflation or unruly price pressures, permitting the central bank to hold the line on interest rates next Tuesday and repeat its conditional pledge that rates will stay unchanged at 0.25 percent through mid-2010.

Frankly, I don't think it really moves the needle for the Bank of Canada, said Doug Porter, deputy chief economist at BMO Capital Markets.

The monthly core number looks a tad higher than expected but really this is pretty much within the range of expectations, he said.

The consumer prices index was unchanged in September from August and was down 0.9 percent in the 12-month period. Markets had expected a 0.8 percent drop.

Core inflation, which strips out energy and other volatile items for a more accurate portrayal of price pressures, rose 0.3 percent on the month and 1.5 percent on the year, topping forecasts of a 1.4 percent rise for the year.

Excluding energy, the CPI rose 1.3 percent.

The Canadian dollar weakened following the report, trading as low as C$1.0398, or 96.17 U.S. cents, compared with C$1.0334, or 96.77 U.S. cents, just before the data.


Recent reports pointing to a quicker-than-expected economic rebound in Canada had raised some market talk that the Bank of Canada could be next in line after its Australian counterpart to raise interest rates.

But the central bank is not expected to take that path next Tuesday. Governor Mark Carney has previously told markets he will hold rates steady until at least the end of the second quarter of 2010 on the condition inflation remains on track to return to the bank's 2 percent target in the medium term.

In July, the bank projected overall consumer prices would bottom out in the third quarter while core inflation would stay in positive territory.

The surging Canadian dollar, which touched a 14-month high this week, combined with excess capacity in the industrial sector is expected to keep inflation low in months to come.

Going forward I think the declines in energy are behind us, so we are going to start seeing that headline rate move higher, but core prices should remain well contained as we move through the next couple of years, said Craig Wright, chief economist at the Royal Bank of Canada.

On a monthly basis, the CPI was dragged down by passenger vehicle prices as well as gasoline, fresh vegetables and traveler accommodation. Upward pressure came from education, clothing, telephone services and health care.

In the 12-month period, gasoline was by far the biggest drag on prices as consumers paid 23 percent less at the pump than they did a year earlier. Natural gas, other fuels, passenger vehicles and mortgage interest costs also fell while costs rose for vehicle insurance, restaurant food, education and home maintenance.