Canada's annual rate of inflation eased unexpectedly to 1.4% in March from 1.6% the previous month, Statistics Canada reported Friday.
Clothing and mortgage interest costs declined during the month, offsetting increases in gasoline prices, the federal agency said.
Core inflation -- which eliminates volatile-priced items such as food and energy -- was 1.7% in March, compared to 2.1% in February.
Economists had expected an overall annual rate of 1.6% and a core inflation reading of 2%.
The Canadian dollar, which has been trading at or above parity with the U.S. currency, fell to around 99.75 cents U.S. following the inflation report.
The Bank of Canada, in its economic outlook released Thursday, said first-quarter economic growth will be near 6% -- the fastest pace in 11 years. However, the central bank said expansion will moderate through to 2012 due to a stronger Canadian dollar and a cooling in the housing market.
Still, the central bank said Tuesday -- following its regular monetary policy meeting — that it would keep its trendsetting interest rate at record-low 0.25%. But the bank dropped a conditional commitment to keep borrowing costs at that level until July, clearing the way for a possible rate hike in June.
The Bank of Canada's low-rate commitment was to aimed at pulling the country out of recession by encouraging spending by both consumers and businesses. That rate policy was conditional on inflation not becoming a threat as the economy return to growth.
Overall inflation is expected to reach the 2.4% range later this year, the bank said, compared to it target of 2%.
Consumer spending is expected to "grow robustly" for the remainder of this year and next, the bank said, and spending "should dampen" as households deal with higher debt-servicing costs.
"Talk of 50 basis point moves any time soon should be quelled by these much milder inflation figures, which suddenly put core trends closer to where the bank expected them to be a few months ago," said Douglas Porter, deputy chief economist at BMO Capital Markets.
"In fact, today's report may even cast a flicker of doubt on whether the Bank will start hiking in June, although that still seems to be the most likely course."
Statistics Canada said Friday that its mortgage interest cost index -- which measures the change in the interest portion of payments on outstanding mortgage debt -- fell 6% in March, following a 5.8% drop the previous month.
Prices for clothing and footwear eased 2.2%.
"The strongest downward pressure in this component came from lower prices for women's clothing and women's footwear. Prices for children's and men's clothing also declined," the agency said.
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