Canada inflation tumbles, easing concern about price pressures

Canadian inflation unexpectedly tumbled in September on a sharp reversal of price hikes in the travel industry, which should knock down concerns that pressures are building in an economy near full capacity.

The consumer price index recorded an annual pace of 2.2%, the lowest in four months and a drop from 2.8% in August, Statistics Canada reported. Economists had expected inflation of 2.7%. Core measures of inflation - considered a better indicator of underlying pressures - also ticked lower and averaged 2% last month.

Slower headline inflation and easing core numbers will reassure policy makers the recent spike in gasoline prices and other products like air transportation is transitory. The 2% core rate is consistent with an economy at full capacity - but not one that is overheating and that should give the Bank of Canada scope to proceed with gradual interest-rate increases.

Inflation had hit 3% in July - the highest in seven years - on the back of gasoline and a jump in prices for air transportation and other travel-related services.

Air transportation costs, which jumped 16% in July, plunged 17% in September. Traveler accommodation service prices were down 6.2% last month. Statistics Canada has changed the methodology in measuring prices in that sector that is capturing more of the seasonal variation in costs.

In its most recent forecasts released in July, the central bank estimated inflation would average 2.5% in the third quarter - which ends in September - before returning back to near the 2% target by 2019. Inflation actually averaged 2.7% in the third quarter.