Inflation Cools, Loonie drops

The Canadian dollar tumbled almost half a cent on Friday after Statistics Canada reported the country's annual inflation rate had fallen sharply to 1.9 per cent in August.

The Canadian dollar lost 0.43 cents US to close at 77.07 cents US. Currency traders bet that the lower-than-expected inflation numbers would result in a more moderate rise in Canadian interest rates.

Economists had been expecting the inflation rate to ease slightly from July's 2.3 per cent rate, but only by 0.1 or 0.2 percentage points.

Core inflation, which excludes such volatile components as gasoline, natural gas and food, also fell dramatically. It dropped from July's 1.9 per cent to just 1.5 per cent last month. Economists had been expecting the core rate to be unchanged.

Last week, the Bank of Canada raised its key lending rate by a quarter of a percentage point to keep a lid on inflationary pressures.

Economists said Friday's inflation numbers show that it has nothing to worry about. "Canadian inflation has just become a toothless tiger," BMO Nesbitt Burns senior economist Douglas Porter wrote in a morning commentary.

Still, Porter said he expected the Bank of Canada would raise rates again in October. But he said Friday's report "will certainly cast some doubt on a December move."

The benign inflation report caused bond yields to fall and prompted one bank, CIBC, to cut mortgage rates Friday.

Stats Can said gasoline prices last month were 7.8 per cent higher than they were in August of last year. But the agency said the rate of increase in gas prices slowed from 17.9 per cent in July to just 7.9 per cent in August.

Consumers paid more for beef, tuition, restaurant meals and tobacco. Computers and fresh vegetables cost less.

On a month-over-month basis, the cost of living actually fell 0.2 per cent from July to August., as car prices fell 2.6 per cent over the month.

"At this time of year, manufacturers increase incentive programs to help reduce stock before the arrival of new models," Statistics Canada said.

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