Canada's inflation eases in December ahead of another likely rate hike

© Reuters. FILE PHOTO: A fuel pump is seen in a car at a gas station in Toronto April 22, 2014. REUTERS/Mark Blinch/File Photo

By Ismail Shakil and Steve Scherer

OTTAWA (Reuters) - Canada's annual inflation rate eased more than expected in December as gas prices came down but core measures remained little changed from the previous month, Statistics Canada said on Tuesday, making another interest rate hike this month likely.

Inflation slowed to 6.3% in December from 6.8% in November, a notch lower than the 6.4% median forecast of analysts. Prices fell 0.6% from the previous month, again showing price pressures easing more than analysts' forecast for a 0.5% decline.

Consumers paid 13.1% less at the pump in December compared with November, the largest monthly decline in almost three years, Statscan said.

The average of two of the central bank's core measures of underlying inflation, CPI-median and CPI-trim, came in at 5.2% compared with 5.3% in November. Excluding food and energy, prices rose 5.3% in December versus 5.4% in November.

"The fact that the core metrics are stable does speak to this idea that there's still an economy in excess demand, that underlying inflationary pressures are pervasive," said Andrew Kelvin, chief Canada strategist at TD Securities.

"With that in mind, I think it argues for the Bank of Canada lifting rates later this month, rather than arguing for them to stay on hold," Kelvin said, adding that he sees a 25-basis-point increase and then a likely pause by the central bank.

December's headline figure is still more than three times the Bank of Canada's 2% target. Most analysts agreed the Bank of Canada would hike rates by a quarter of a percentage point on Jan. 25, when it next meets.

Money markets see a 77% chance of a quarter-point hike by the Bank of Canada next week, up from 70% before the data. They also expect rates to peak at about 4.5%, and a shift to rate cuts in the second half of the year.

Michael Greenberg, SVP and portfolio manager at Franklin Templeton Investment Solutions, said the stickiness of inflation will force the bank to leave rates at a high level for some time.

To get inflation back to target, the central bank "might need to be a little bit more stubborn and keep those rates elevated despite falling headline inflation," Greenberg said.

The bank has raised its benchmark interest rate at a record pace of 400 basis points in nine months to 4.25% and said after its last increase that a decision to raise rates further would be more data-dependent.

Earlier this month, Statscan said the economy recorded a massive jobs gain in December and the jobless rate unexpectedly declined, and on Monday the Bank of Canada released its quarterly survey of Canadian businesses, which showed they expect a mild recession but inflation to remain high.

The Canadian dollar CAD= was trading 0.2% higher at 1.3380 to the greenback, or 74.74 U.S. cents